Tesla (TSLA) Is Overpriced; Here’s Why

TSLA defied all expectations earlier this month, where it crossed the $1000. Within two weeks, it reached $1500. With Tesla's quarterly earnings coming out on the 22nd of July, the question remains if Tesla can sustain this growth.

Tesla's Volatility

One of the most reliable ways to forecast the market's views on TSLA is to study the prices of call and put options, which recently have been highly volatile. Although volatility is not uncommon for options, the level seen for a 'blue-chip' large-cap stock is massive. This signifies the market's extreme everchanging views about TSLA, considerably growing its risk. Furthermore, this means that any negative financial results can have amplified ramifications. TSLA's short interest has come down nearly 35% from March. Many assume that this is because more investors have confidence in Tesla; this is not the case. Instead, it is more probable that short-sellers have been forced to buy-to-cover due to excessive losses.

Investor's Optimism Loop 

'A rise in the stock market generates investor optimism, which in turn generates a further rise in the market, which generates further optimism, and so on; and this feedback loop drives stock prices up, creating a trend that can be followed profitably' - More Money Than God by Sebastian Mallaby. In a period of two weeks, Tesla's stock price has increased by 50%. Yet, the SPY has risen by only 5%. It then is a marvel that when consumer spending nor any underlying factor of Tesla has changed, that it is has increased by such a large amount. Hence, the theory of an 'optimism loop' seems probable. 

Why Tesla Should Not Be Treated Like a Tech Company

 Tesla is often regarded as a technology company. This thought makes sense; after all, Tesla is based in Silicon Valley and has restyled the car into a dynamic software platform. Its high valuation comes from tech-oriented investors who see Tesla's valuation as reasonable amongst large-cap tech names like Microsoft, Google, and Apple. Nevertheless, the fact is that Tesla is an automobile company or, at best, an integrated electric company. Morgan Stanley analyst, Adam Jonas warns that '[Tesla] still faces a multitude of risks associated with running a car company that the market seems to be ignoring," In the report, it is estimated that Tesla would produce 2 million cars annually for the next ten years. His forecast clearly shows that TSLA's high stock price is unjustified. "At $1,000, we believe the stock is discounting roughly 4 million units" by 2030.' At $1500, it would be discounting roughly double that, or eight million units. 

Conclusion

In conclusion, while Tesla is undoubtedly a promising high growth company, it is grossly overpriced. Global economic uncertainties and market volatility amongst a myriad of other factors make TSLA a risky purchase.