Is Tesla (TSLA) stock in a bubble?

Why Tesla ($TSLA) is likely in "bubble" territory...

Many say Tesla stock is currently in a bubble – but is it actually? Or is it merely selling for a high premium?

Tesla’s current market cap as of November 2024 (over $1T USD) exceeds the combined market caps of all U.S. automakers in 2024.

Additionally, Tesla’s market cap exceeds the combined market caps of the next 15 largest global automakers (e.g. Toyota, BYD, Ferrari, GM, Xiaomi, Mercedes-Benz, Porsche, Volkswagen, BMW, Ford, Honda, etc.).

This Tesla stock bubble/premium is fueled by things like:

• Elon Musk: Everyone wants to invest in Elon’s genius. Elon also effectively generates hype about the cool tech Tesla is building.

• Cutting-edge tech: Tesla is at the cutting-edge of technology (e.g. FSD, Robotaxis, Optimus, Dojo, etc.).

• Cult-like retail investors: Many are “all-in” on Tesla, others “HODL” forever, etc. Tesla is one of the most owned stocks by retail.

• Social media hype: The retail investor base routinely hypes Tesla on social media (free marketing) which convinces others to invest (self-sustaining retail network effect).

Tesla stock often behaves more like a hybrid stock-crypto (e.g. Bitcoin) wherein we have a combo of: perma-HODLers, “all-in” investors (100% TSLA portfolio), a massive retail investor base (Tesla Army), social network effects, and those in it for core business (current & future tech).

In other words, you’ll always pay a premium if you want to own shares of Tesla.

The good news for Tesla buyers is that the Tesla premium is time-tested and incredibly sticky – it’ll likely remain for as long as Elon is CEO – and may even increase in the future.

So you if you pay a bit of a premium now, it is unlikely that the premium will vanish if/when you opt to sell shares.

What is the difference between a Tesla stock “bubble” & “premium”?

Bubble

A state where the market price of a stock significantly exceeds its intrinsic value.

The price is driven by speculation, hype, or external market factors (e.g., trends, sentiment), rather than the company’s financial health or growth trajectory.

Characteristics:

1. Excessive Valuation: Metrics like P/E and P/FCF are disproportionately high relative to the company’s earnings growth and industry peers.

2. Weak Fundamentals: Revenue, profit margins, or cash flow fail to support the high valuation.

3. Speculative Drivers: Price is driven more by future expectations, investor enthusiasm, or external narratives rather than current performance.

Example (Tesla):

• Forward P/E: 112.23, far exceeding industry norms for even high-growth tech companies.

• Revenue Growth: 7.85% YoY, low for a company with such a high valuation.

• Conclusion: Tesla’s current valuation would qualify as a bubble if its price is not justified by future revenue or profit growth.

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Premium

A state where the market price is above intrinsic value, but the overvaluation is justified by the company’s strong fundamentals, unique position, or future growth prospects.

A premium reflects investor confidence rather than speculation.

Characteristics:

1. Justifiable Valuation: Metrics like P/E and P/FCF are higher than peers but supported by superior growth rates or profitability.

2. Strong Fundamentals: Consistent revenue growth, high margins, and robust cash flow align with the market valuation.

3. Growth Drivers: Price reflects high-quality management, innovation, or a strong competitive moat that supports future growth.

Example (Tesla):

• Forward P/E: Could justify a premium if Tesla demonstrated sustained revenue growth exceeding 20-30% YoY and improved margins.

• Market Position: Tesla’s leadership in EVs and renewable energy technologies could warrant a premium if it maintains dominance and expands profitability.

Why Tesla requires specific bubble vs. premium criteria

It is important to avoid getting caught up in the trap of generalizing bubble criteria across different companies – this can be a mistake.

Things like P/E ratio, P/S ratio, P/B ratio, FCF yield, etc. can give us a rough idea as to whether companies might be in bubble territory – but companies have different business models and growth trajectories – so generalizing isn’t ideal.

Therefore, we should not assume that Tesla having a high P/E ratio, P/S ratio, etc. (above certain thresholds) automatically indicates “bubble.”

1. Unique Business Model: Operates as a hybrid auto/tech/energy company. Diversified revenue streams (EVs, energy, software). Heavy emphasis on future potential over current earnings.

2. Growth Profile: Historically trades at higher multiples due to rapid expansion. Tech-like scalability justifies some premium.

3. Market Leadership: First-mover advantage in mass-market EVs. Exceptional brand value and Supercharger network effects.

4. Investor Base: High retail participation and cult-like following drive volatility. Valuation influenced by investor sentiment and speculation.

5. Future Expectations: Priced for massive future market share and technological breakthroughs (e.g., FSD, robotaxis). Energy business adds valuation complexity.

How to determine if Tesla (TSLA) is in a “bubble” vs. selling for a “premium”

I’ve created a customized framework specific to Tesla for determining whether the company is in a “bubble” vs. selling for a “premium.”

Although this formula is not perfect – it is likely most accurate with extreme scores (e.g. 0-35 extreme bubble, 36-50 large bubbles, and 97-100 fair value).

It is likely less accurate in identifying subtle distinctions between small bubbles (66-75) and high premiums (76-84).

Tesla bubble vs. premium framework

Formula: (Growth & Fundamentals × 0.65) + (Technical × 0.20) + (Sentiment × 0.15)