Tesla's 425% surge this year ignores fundamentals more than any other stock rally in history, Needham says
- Tesla's 425% year-to-date rally places the stock at an unsustainable high, Needham analyst Rajvindra Gill said Monday.
- "We've never seen a stock rise that much that fast with such little regard for past fundamentals," Gill added.
- Wall Street's revenue and earnings estimates haven't kept up with the stock's meteoric rise this year, the analyst said.
- Even if Tesla can lift sales at a compounding annual growth rate of 21% over the next decade and slash costs, Needham's 2029 base case implies a 14% decline.
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Tesla's rally through 2020 defies expectations, market precedent, and even its own example, Needham said Monday.
The automaker's shares are up roughly 425% year-to-date compared to the S&P 500's 9% gain in the same period. Though some of the gains were fueled by earnings beats and analyst upgrades, surging interest from retail investors and Tesla bulls largely drowned out cynics since the stock's March low.
While it may be "unfashionable" to judge the stock on its valuation, doing so is necessary to separate the hype from the shares' true value, Needham said.
"In our experience, we've never seen a stock rise that much that fast with such little regard for past fundamentals," analyst Rajvindra Gill said in a note before reiterating his "underperform" rating for Tesla shares.
For one, consensus estimates haven't kept up with Tesla's share surge. The stock leaped as much as 490% from its March bottom to current levels. Over the same period, Wall Street's revenue estimate for 2021 climbed only 12%, and its adjusted earnings estimate jumped 25%. Estimates for 2022 revenue and earnings increased 2% and 42%, respectively. The rally "created a further disconnect" between the stock's price and fundamentals that first cropped up last year, Gill said.
Even if investors look further out, Tesla's current valuation leaves limited upside and possibly significant downside, he added. Needham's base-case scenario sees the automaker's sales grow at a compounded annual rate of 21% over the next decade. Free cash flow grows at a 35% rate. By 2029, the company sells 4 million cars per year at an average price of roughly $41,000, cementing it as the world's top automaker.
Yet the base case implies a 14% slump from today's stock price when discounting 10 years of free cash flow, Gill said. Even the firm's bearish case, which projects annual sales growth of 17%, is "still no easy accomplishment."
Needham also dispelled the Tesla bulls who suggest Elon Musk's company should be valued more like a tech giant than a legacy automaker. Tech stocks trade at lofty earnings-per-share multiples between 35x and 45x. While Tesla has posted steady sales growth in recent years, "it has not shown the consistent profitability that warrants" such a valuation, Gill said.
Even if it deserved to trade at the top of the tech-multiple range, Tesla stock would still sit at roughly $330, or 24% lower than its current levels, he added.
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