Is the Tesla share price ridiculously expensive?

Is the household EV name flying too close to the sun?

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The Tesla Inc (NASDAQ: TSLA) share price is up 121% in 2023, more than doubling an investment made less than a year ago. The resurgence places the electric vehicle maker's valuation back under the microscope for some, attracting US$22 billion worth of short-selling.

Indeed, there is currently no shortage of pessimism surrounding Tesla's future. A quick Google search will yield stories discussing the polarising nature of the Cybertruck and its potential unpopularity, the pressure to provide collective bargaining rights to employees, and the ever-present concern of competition.

The latest price target from HSBC Securities labels Tesla a US$146 stock, hinting at a possible 39% downside from here.

Does it mean the Tesla share price is ridiculously expensive right now?

Checking the fundamentals

Tesla has grown into one of the most valuable companies in the world. The enormous growth spurred forward by the company's popular Model 3 and Model Y variants enabled profitability since 2020. Since then, earnings per share (EPS) have grown by more than 20-fold.

Still, investors have always applied a premium to the Tesla share price. The EV maker has spent the majority of the last three years carrying a price-to-earnings (P/E) ratio above 50. For context, the global auto industry average is 14.4 times earnings.

MetricTeslaBYDLi Auto
Market capitalisationUS$748 billionUS$79 billionUS$36 billion
Earnings per share (EPS)US$3.11US$1.39US$0.91
Price-to-earnings (P/E) ratio76.819.240.5
PEG ratio3.21.01.2
Data as of 11:00 am AEST 6 December 2023

As shown in the table above, Tesla trades at a considerable premium to its peers. Notably, the Elon Musk-led company is valued at nearly 10 times as much as rival and prominent EV brand BYD. If you run the sums, roughly three-quarters of this premium is attributable to Tesla's elevated earnings multiple.

This implies Tesla must deliver a supreme growth rate for the foreseeable future to justify the fundamentals. Unfortunately, this is not what investors have witnessed in recent quarters, as revenue growth slows amid a softening economy and rising operating expenses.

Why I'm still backing the Tesla share price

Right now, Tesla remains the largest holding in my portfolio, constituting nearly 17% of my stock-picking investments.

While the near-term outlook is less picturesque for Tesla than it was three years ago, I'm still bullish on the company's future prospects for a few reasons.

  1. Tesla is arguably the leader in a rapidly growing, early-stage industry.
  2. The company possesses strong moats, such as brand and technology leadership.
  3. Engineering cross-pollination: No other automotive company can tap into a brain trust like SpaceX and Neuralink.

Whether or not a company is 'ridiculously expensive' can depend on the time horizon. In my opinion, the Tesla share price is possibly both expensive and cheap… expensive based on the current fundamentals, but potentially cheap if EVs are the predominant mode of transportation in a decade or two.

Motley Fool contributor Mitchell Lawler has positions in Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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