Can Tesla's Dizzying Valuation Ahead Of S&P Inclusion Last? Analysts Are Divided

Tesla Inc TSLA has returned 664.74% on a year-to-date basis and surged nearly 790% in one year but some analysts and experts believe the automaker’s stock is due for a reversal of fortune post its addition to the S&P 500 while others disagree.

The Tesla Naysayers: Last week, JP Morgan analyst Ryan Brinkman reiterated his Underperform rating for the Elon Musk-led company and raised his price target from $80 to $90. Brinkman said he was at a loss to explain the dramatic rise of Tesla’s stock in a year while at the same time analysts have on average lowered their EPS estimates for the EV firm for every year between, and including, 2020 and 2024.

Similarly, last week, Jeffries analyst Philippe Houchois downgraded the Palo Alto, California-based automaker’s stock from Buy to Hold but raised his price target from $500 to $600.

Houchois cited “execution risk” as a factor and observed, “We don’t believe that Tesla can dominate the industry given the latter’s size, structure and politics.”

The Believers: The incoming Joe Biden Administration, increase in EV tax credits and incentives in the United States would fuel EV adoption in the United States, according to Wedbush analyst Daniel Ives. The automaker’s Shanghai factory is also a “major competitive advantage.”

Ives said that Tesla’s $5 billion stock sale is a smart move this month in a note and maintained his Neutral rating on the automaker with a $560 price target.

On deliveries, Goldman analyst Mark Delaney noted last week that Tesla could achieve 15 million units by 2040 should it be able to sustain a mid to high 20% share of the EV market, CNBC reported.

Possible Headwinds: Legacy automakers are increasingly making moves to challenge Tesla’s dominance in EVs, which is already on display in Europe with the popularity of Volkswagen AG’s VWAGY ID.3, according to CNBC. 

General Motors Company GM is investing $27 billion into its electrification efforts as well.

Tesla also faces challenges on the quality front with Consumer Reports recommending only one of its four models and JD Power assigning the vehicles the lowest ranking of 32 brands it evaluated in its annual quality study, CNBC reported. 

IHS Markt forecasts peg EV sales at 9.4 million or 10.2% of 92.3 million vehicles sold worldwide in 2024, which is another challenge for Tesla to overcome.

The Heady Valuation Puzzle: Tesla enjoys a market cap that is greater than nearly all established auto industry ahead of its addition to the S&P 500.

Loup Ventures Managing Partner Gene Munster thinks Tesla’s advantage over its traditional rival lies in its focus on software. CNBC noted that Tesla's over-the-air upgrades make its technology "leaps and bounds" ahead of rivals, including both the legacy automakers and EV-centric rivals like Nio Inc. NIO.

CNBC “Mad Money” host Jim Cramer who is a self-confessed fan of Tesla said shareholders of the company don’t care about revenue or earnings per share but rather about the story.

“It’s a technology company, not an auto company,” said Cramer last month. However, the analyst noted that the market is insane and the upside cannot continue forever. 

Tesla Price Action: Tesla shares closed nearly 4.9% higher at $639.83 on Monday and fell 0.6% in the after-hours session.

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