Is Tesla's Valuation a Bubble or Backed by Real Growth?

Key Points

• Some might say that Tesla stock's current valuation is an exaggeration of reality; however, many bull cases call for more.
• Wall Street analysts are willing to risk their reputations by calling for an even higher valuation today. However, the stock justifies it this time.
• Institutional investors agree that this stock trades at a premium for a good reason, and so should retail investors.

Once the United States presidential elections were over, there seemed to be an everything rally for the financial markets, or, as Warren Buffett likes to say, a rising tide lifts all boats. However, he also likes to add that when the tide goes out, that’s when everyone knows who’s been swimming fully clothed or not. Today, some call for shares of Tesla Inc. NASDAQ: TSLA to be in the latter group, considering its valuation today.

These bears would be wrong, though. Sure, the stock trades at a high price-to-earnings (P/E) ratio of up to 95.1x today, which is exorbitantly higher than the auto sector’s average valuation of only 18x. Investors would fail to realize, however, that Tesla is not just any other automotive stock. Therefore, it shouldn’t trade like one. Tesla behaves more like a technology stock and an artificial intelligence one for a reason.

That’s because Tesla is one. Wall Streeters fail to realize that Tesla owns all the software behind the industry's self-driving breakthroughs, not to mention additional ownership in other tech ventures like social and generative artificial intelligence through OpenAI and X (formerly Twitter), both businesses that aren’t reflected in Tesla’s current valuation.

Breaking Down Tesla’s Valuation: Why Bulls Are Holding Strong

Now that the “It’s just a car company” argument is somewhat out of the way, here’s what investors should focus on. Tesla’s market capitalization is $1.1 trillion today, which by all measures would be an exaggeration were Tesla only a car manufacturer. Now that investors know this isn’t the case, here’s how Tesla pares against others in AI and technology.

Semiconductor and artificial intelligence supporter Nvidia Co. NASDAQ: NVDA has reached a valuation high of $3.6 trillion, representing over 15% of the United States Gross Domestic Product (GDP). Then there is Alphabet Inc. NASDAQ: GOOGL and Meta Platforms Inc. NASDAQ: META, who trade at valuations of $2.2 and $1.4 trillion, respectively.

Putting it this way, Tesla’s valuation today wouldn’t seem that far from the norm. Of course, in order to lean on this view, investors have to wholeheartedly believe that Tesla is far more than just a car company. Now, here’s an interesting point of view on social platform X.

Elon Musk, Tesla’s CEO, took the company private in 2022. While today it is reportedly worth 80% less than what he paid for it, Musk saw fit to allocate up to $44 billion to buy out the company formerly known as Twitter. Why would Musk pay such a high ticket for this platform, and what are his plans?

This might be on the more speculative side. Still, there are trends suggesting that Musk wants to turn X into a super application, exactly the way China has done with Tencent Holdings Ltd. OTCMKTS: TCEHY and Alibaba Group NYSE: BABA, which operate the WeChat and Alipay platforms in the nation, respectively.

Looking at Musk’s resume, as the founder of payments platform PayPal Holdings Inc. NASDAQ: PYPL, it wouldn’t be too far-fetched to see his former expertise turn X into a similar platform to the ones already discussed.

Then there’s the OpenAI aspect, the creators of ChatGPT who are also owned and backed by Musk. Three tailwinds—electric vehicles, artificial intelligence, and decentralization—are behind Tesla's stock price today.

Here’s What Wall Street Sees: Aligning Reality and Investor Expectations

While trying to value Tesla under all these assumptions will be beyond Wall Street analysts' reach, a few were willing to put their necks—and reputations—on the line to give Main Street a broader look into Tesla stock's future.

Wedbush recently reiterated its "Overweight" target on Tesla while also boosting its price targets to a high of $400 a share, up from its previous view of $300. This new valuation would call for a net upside of as much as 14.3% from where it trades today.

Despite a 48% rally in the past month alone, there are plenty of reasons to justify the possibility of Tesla giving investors another such run shortly, especially as more participants realize that the company has all of the already mentioned tailwinds working in its favor.

These analysts are not alone in their high expectations for Tesla stock. As of November 2024, institutional buyers from Jennison Associates decided to boost their Tesla holdings by as much as 11.9%, bringing their net position to a high of $3.2 billion today.

All told, investors now must see Tesla for what it really is: a stock that trades at a massive premium to its peers; however, there are reasons to believe that the peer group needs to be correctly selected. More than that, any stock that trades at higher valuations for prolonged periods of time usually has a good reason to do so, and Tesla checks all the boxes.