Are Tesla shares too expensive?

The company's share price has more than doubled in 2020.
August 3, 2020

“Tesla stock price is too high imo”

So tweeted Tesla’s eccentric CEO Elon Musk in May of this year.

Shares in the electric carmaker traded at a high of $772.77 on that day. Three months later, they’re valued at $1,529.52.

There haven’t been any rogue, stock-related tweets from Musk since May but some investors are wondering — if $772.77 was too much then is $1,529.52 plain crazy?

What’s happening

Headline-grabbing and unpredictable, Tesla has been the Kanye West of the stock market in 2020.

Shares in the company doubled in value from the beginning of January to the end of February, reaching just over $900 before crashing down to $427 in March.

The tweet that made short sellers everywhere celebrate

Since then, however, the carmaker’s shares have risen astronomically.

This was particularly true in July. Tesla made waves across the media — and saw its share price surge — after it announced a fourth consecutive profitable quarter.

That was big news for the company, particularly given that the pandemic had hurt sales and forced the firm to close some of its production facilities.

It was also an impressive feat when compared to other carmakers’ results, most of which were dire.

Flying car stocks

Tesla is not the only electric car company to have seen success during the pandemic.

rose from $13 in early May to almost $80 in June, before tumbling down to around $30/share as of the end of July.

Nikola’s Badger truck

The company, which plans on making electric trucks, exploded in popularity after announcing it would be taking reservations for one of its pickup trucks.

Similarly, the value of shares in the SPAC Tortoise Acquisition almost tripled after it announced that it would be acquiring Hyliion, a firm that produces batteries used to power vehicles.

Although shares in both companies have since fallen, their initial surge in value speaks to a wider behavioural pattern that seems to be a big driving force behind Tesla’s behaviour in the stock market.

Electric bitcoins

Many investors will remember the bitcoin mania that swept across the world in 2017.

Some people believed that bitcoin represented the future of money and that it was set to play a major role in our economic system.

Others just wanted to make short term gains. Plenty of people were in both categories.

The craze for Tesla shares and those of other electric car companies are similar in many ways.

There is a large group of people that, entirely reasonably, think Elon Musk is a genius and that the world will soon be dominated by green energy companies like Tesla.

Hey, we’re not the only one making the comparison...

At the same time, it’s clear that some people are going along for the ride just to make a few quid.

The potential problem with this latter group is that, if there are too many of them, they can inflate the price of shares beyond their ‘true’ value.

By market cap, Tesla is now bigger than McDonald’s, Sony and Lloyds Bank combined. It’s also substantially larger than Toyota, another major developer of electric vehicles which sold 10.7 million cars in 2019, versus Tesla’s 370,000.

There’s an argument to be made that this is not unreasonable because of the Tesla’s potential future earnings.

But valuing Musk’s firm as by far the biggest car company in the world does seem premature as it has a lot of ground still to cover.

True believers should also remember that not everything goes to plan and crashes can happen. Just ask all those bitcoin HODLers…

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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