Can Tesla Justify Its Trillion-Dollar Valuation?

The world’s first-ever trillion-dollar automaker stock now exists. With a valuation of $1.1 trillion at the time of writing, Tesla (TSLA) has quickly become one of the most valuable companies in the world in a relatively short amount of time.

Now, this valuation remains the key sticking point between bulls and bears on TSLA stock. Undoubtedly, this company has innovated and disrupted a massive market segment in a way many people thought was impossible to do. Investors ought to give CEO Elon Musk props for his ability to do what was thought to be the impossible. There remains a tremendous amount of optimism around what the future could hold for Tesla, given the company’s disruptive traits.

However, Tesla’s current valuation implies some rather incredible growth over the very long term. As most investors know, the higher a company’s valuation goes, the more inherent risk with said investment. Accordingly, TSLA stock appears to be a high-risk, high-reward investment that has continued flying despite the risks investors face.

Can this rally continue? Let’s dive into what investors may want to consider when looking at Tesla right now.

For context, I’m neutral on TSLA stock. (See Analysts’ Top Stocks on TipRanks)

Super-Focused on Clean Energy Transition

Among the higher-level catalysts that have taken Tesla higher is the company’s vision to become a leader in promoting a clean energy-driven future. Electric vehicles have become a reality in large part due to Tesla’s aggressive pursuit of excellence in this space.

However, Tesla’s also got other core businesses many investors point to as reasons to own this company from a clean energy standpoint. The company’s battery and solar segments are leaders in their own rite. Tesla’s ability to create renewable power, and use that power for its EVs, is a full-circle process many investors have bought into.

Now, bears will note that Tesla’s solar roof project and its 4680 battery have been slow to come to market (to put it nicely). Accordingly, Tesla may have to spend more time focusing on these businesses to really see them succeed.

That said, for those looking for a company hell-bent on a greener future, Tesla is making a case to be the top choice in this regard.

Tesla: Adequate Growth Opportunities on the Horizon

Assuming Tesla can maintain its industry cachet, there appears to be plenty of room for this company to gain ground on older rivals who do not boast a similar image. There are several global auto organizations from which Tesla can steal market share. The company’s doing that right now.

Both Ford (F) and General Motors (GM), for starters, are actively working to grow their EV businesses. GM sold around 1.3 million EVs in Q3 alone. However, the dominance of these companies in the gas-powered vehicle segment does not necessarily translate into the EV segment well. At least, that’s what Tesla bulls purport.

The ability of legacy automakers like GM and Ford to really penetrate the EV market is a concern for level-headed Tesla bulls. While many irrational “Tesla bros” suggest Tesla will be the only automaker in existence a decade or two from now, history has shown that car buyers want to have a choice in this space. Tesla’s just one of many great brands and will need to continue to prove its superiority over time as the competition improves.

Valuation: The Key Factor to Consider

Most investors know the growth story that is Tesla. This is a company that’s looking to fundamentally change how we view the transition toward greener energy options and a greener future. That’s commendable, for sure.

However, for investors, the valuation of any company is the key factor one should consider. One’s future returns depend on the price one pays for a given investment at a specific time. For investors looking at the makeup of the valuations of automakers right now, the numbers don’t add up.

Ford and General Motors have a market capitalization of $79 billion and $87 billion, respectively. However, Tesla’s is valued at roughly $1.1 trillion. That’s a complete shocker given that Tesla sold less than a quarter of the cars that GM or Ford sold in Q3.

Sure, Tesla is looking to lead the way to have more recurring, software-based revenues, and sure, cars aren’t one-time purchases as they once were (necessarily).

However, the view that Tesla should have such a valuation multiple is one that’s worth questioning, even by bulls. This is a company that’s in the nosebleeds in terms of valuation and ought to be looked at critically for investors to gauge whether buying TSLA stock is a prudent move right now.

Wall Street’s Take

Turning to Wall Street, Tesla has a Hold consensus rating. Out of 23 analyst ratings, there are 10 Buy recommendations, six Hold recommendations, and seven Sell recommendations.

The average Tesla price target of $887.38 implies 22% downside potential. Analyst price targets range from a high of $1,400 per share to a low of $215 per share.

Bottom Line

Tesla’s enormous market cap compared to its rivals can reverse at some point. It’s possible, if not likely, that valuations are incredibly inflated right now. On most historical measures, we’re currently in the midst of an incredible bubble the likes of which the world has never seen.

That’s the bearish view.

Bulls will note that Tesla’s innovation has only started. This is a company that’s only just begun to disrupt a range of businesses. Cars are just the first of many sectors Tesla is yet to drive growth via innovation and disruption. Fair enough.

Right now, TSLA stock is a polarizing one for obvious reasons. Investors looking at Tesla, or any company for that matter, would do well to consider the bull and bear case before forming an opinion. Looking at the numbers helps too.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.