On December 21, Tesla’s (TSLA) long wait to be included in the S&P 500 comes to an end. Having proven itself capable of turning a profit for four consecutive quarters – the minimum requirement for inclusion – the EV pioneer will takes its place alongside the other 499 leading US’ listed companies in what is generally considered to be the stock market’s benchmark index.
Ahead of the anticipated event, J.P. Morgan analyst Ryan Brinkman has been fielding calls from investors wondering if they should buy Tesla shares “given that many funds’ performance is evaluated against this benchmark.”
To which Brinkman has a succinct and blunt answer.
“We recommend investors not weight Tesla shares in their portfolio in equal proportion to the S&P because Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so.”
“For instance,” Brinkman adds, “Tesla trades at 1,325x LTM P/E and at 291x 2020E and 175x NTM Bloomberg consensus EPS (vs. best in class auto comps BMW, Daimler, and Toyota 14x, 10x, and 16x NTM EPS, respectively).”
While many analysts have sounded the alarm bells time and again on Tesla’s stratospheric valuation, investors who have taken the plunge in spite of the warnings, have been handsomely rewarded over the years.
However, Brinkman says that before making any rash Tesla stock purchases ahead of the S&P 500 inclusion, investors should consider another metric.
Tesla’s share price has ballooned by 808% over the past 2 years, and in that period, on average, analysts’ 12-month price targets have increased by 451%. Over the same time, the analysts have also “simultaneously lowered their estimates for Tesla EPS for 2020, 2021, 2022, 2023, and 2024.”
This is baffling to Brinkman.
“As difficult as this is to conceive ― that the shares would be worth +808% more despite lower than previously expected earnings,” the analyst says, “This is what the Bloomberg data shows, and it is strongly suggestive of the idea that something apart from the fundamentals (speculative fervor?) is driving the shares higher.”
According to Brinkman, though, the shares are definitely heading lower. Despite raising the price target from $80 to $90 due to Tesla’s recent $5 billion at-the-market offering, it is still a steep 86% drop from current levels. Needless to say, Brinkman’s rating stays an Underweight (i.e. Sell). (To watch Brinkman’s track record, click here)
While the Street’s overall projection is not quite as bearish as Brinkman’s, it is not all that promising, either. Based on 10 Buys, 8 Holds and 7 Sells, the stock has a Hold consensus rating. Given the $403.24 average price target, the Street expects Tesla shares to be changing hands at a 37% discount a year from now. (See Tesla stock analysis on TipRanks)
