An overnight surge has pushed Tesla's valuation to 83 times expected earnings. Tesla hopes the market will see it as an AI company, but if Tesla's valuation is on par with the AI giant NVIDIA at 41.8 times, it means the stock price would have to halve from current levels
After the disappointing Robotaxi presentation lowered market expectations, Tesla's third-quarter report made a stunning turnaround, with the stock price skyrocketing overnight. However, concerns about Tesla's valuation have emerged, and Wall Street also has differing views on the future.
On Thursday, Tesla surged by 21.9%, marking the largest daily gain since May 2013.
This surge pushed Tesla's valuation to 83 times expected earnings, more than twice the price-to-earnings ratios of major tech giants like Apple, Microsoft, and Amazon. FactSet data shows that Apple, Microsoft, and Amazon have forward P/E ratios of 34.4 times, 31.4 times, and 31.1 times, respectively.
Tesla hopes the market will see it as an AI company, but if Tesla's valuation matches the 41.8 times of AI leader NVIDIA, it would mean the stock price needs to drop by half from its current level.
Undeniably, Tesla's financial report has bright spots, but there are also concerns. Wall Street still has significant differences in opinions on the future.
Wall Street Debates the Future
The biggest surprise in Tesla's third-quarter report was the unexpectedly improved profit margin, reversing the two-year downward trend, with total operating profit reaching $2.7 billion, 37% higher than the general expectations on Wall Street.
In addition, the first positive gross margin for Cybertruck, Musk's optimistic statements such as the possibility of a 20%-30% increase in car deliveries next year, have greatly boosted investor confidence.
However, Tesla's overall growth is far below the company's long-term normal levels. Car total revenue in the third quarter increased by 2% year-on-year, after two consecutive quarters of decline. This still appears weak compared to Tesla's core business's average quarterly growth rate of 45% from 2020 to 2023.
Furthermore, the sustainability of the profit margin improvement is also a question. Tesla's CFO Vaibhav Taneja said in Wednesday's conference call, "Maintaining these profit margins in the fourth quarter will be challenging given the current economic environment."
Wall Street's views on Tesla's future are polarized, with some very optimistic, even predicting a more than 40% increase in stock price, while others are more cautious, believing that Tesla has not yet addressed long-term growth concerns, and even predicting a nearly 40% drop in future stock prices.
Goldman Sachs and Morgan Stanley still have "concerns". Goldman Sachs believes that Tesla's financial report is a gradual positive signal, but doubts remain about whether Tesla can achieve its FSD performance and vehicle delivery growth targets by 2025, as well as the sustainability of gross margins.
Morgan Stanley stated that this strong financial report may signal the "bottom" of profit expectations and sentiment in the automotive industry, but whether Tesla's growth concerns have truly eased remains questionable.