Is Tesla overpriced? How much?

Short-sellers have bet that Tesla is overpriced. And they have lost millions.

The stock everyone regrets not getting earlier in 2020 is Tesla. The price of the company has soared to the skies like a SpaceX rocket. The stock is now out of orbit. Its price does not correspond to the dividends delivered so far to its shareholders: $ 0. 

This little correspondence with reality has raised the suspicions of many investors who have shorted the stock. And they have lost a lot of money. In 2020, short-sellers lost $40 billion, according to an analysis by S3 Partners.

Stellar Rises of Tech Companies

Tesla isn’t the first tech company with a surprising rise. The history of Wall Street is littered with stories of breakthrough companies raising high expectations for incredible revenue and ultimately generating great disappointments.

In the technological field, we have the close example of Cisco, which in March 2000 reached a capitalization of 555 billion dollars, becoming the most valuable company in the world above companies such as Microsoft or Apple.

Expectations at Cisco were well-founded. Internet service providers were expanding, and the company’s hardware was key to Internet services. 

Forecasts promised that Cisco would become a company worth more than a trillion dollars. With the turn of the millennium, the promise of an end-to-end connected world seemed ever closer to being realized, and Cisco was offering the equipment needed for that new brave world.

There were some signs that things could go wrong. Cisco’s price-earnings ratio was 120, up from Microsoft’s 52. However, this large difference between the two industry leaders was explained by analysts who pointed out that Microsoft was facing an antitrust lawsuit.

In 2001, Cisco was worth a fifth of its maximum price.

Have we already seen the history of Tesla?

As of February 2, 2020, Tesla’s price-earnings ratio is 1,686.37. An enormous difference compared to automotive leaders like Ford at 47.10 or Toyota at 16.7. 

Tesla’s P / E ratio is still above other tech companies with a wide P / E ratio like Nvidia (106) or Microsoft (35.31).

There are good reasons to expect significant growth in sales from Tesla. Governments in major developed economies are concerned about adopting electric cars as soon as possible to combat climate change, and this commitment has benefited companies like Tesla.

However, the market behavior seems to indicate that there has been more optimism than there should have been around this company.

Irrational times for the market

In any case, “rational” is a word that doesn’t fit market behavior in 2021. The year has started with crazy stock movements. 

Retail investors rocket up moribund companies in a historic short squeeze at the end of January. Companies heavy shorted as GameStop, AMC, and even Blockbuster reach its higher prices in years.

Many Tesla investors don’t follow the fundamentals. An Elon Musk’s tweet can lead to a new peak or new low in the company, as happened several times during 2020. 

In May 2020, Musk tweeted that Tesla shares were “too high,” and the price dropped. Even companies not related to Tesla have obtained gains in the irrational movements that follow tweets.

In January 2021, Musk suggested using Signal in a Tweet, and a small health care company based in Texas reached 1500% up. Tesla’s CEO changed its Twitter’s biography for adding “bitcoin,” and the price of the cryptocurrency went up 20%. 

Analysts as Brian Sozzi consider that this behavior is a sign of a bubble in the market. How much will time pass before a market crash?