Tesla Stock has skyrocketed: is it a buy?

Shares of an electric car company You’re here (NASDAQ: TSLA) have been on a tear recently. Over the past year, the stock has increased by over 750%. In the last five trading days alone, stocks have risen nearly 40%.

The growth stock’s huge upward movement over the past year was initially driven by better-than-expected business execution. Recently, however, the news of an upcoming stock split appears to be the main driver of big gains.

Has the rise of the stock gone too far? Or is the stock really attractive at this level?

Model 3. Image source: Tesla.

Investors love Tesla’s growth

It’s no surprise that investors have applauded Tesla’s recent trading performance in buying stocks over the past year. The company has gone from regularly missing delivery targets and production milestones to over-deliveries on many of its plans. Last year, for example, Tesla went from an innovation stage to launching vehicle production in less than a year at a new plant in Shanghai. This year, the automaker began shipping its Model Y about six months earlier than expected.

More recently, Tesla said the Model Y achieved an impressive positive gross profit margin in its first quarter of production. Meanwhile, the company’s Model 3 has become the best-selling vehicle in China, which is the world’s largest car market. And the construction of another car plant in Berlin is progressing rapidly.

Solidifying the company’s growth, Tesla reiterated pre-COVID predictions for half a million shipments in 2020, despite continued plant closures in the United States and China earlier this year. If the automaker succeeds (and there’s a good chance it will), deliveries in 2020 will increase by 36% year over year.

Finally, investors are probably excited about the huge addressable market ahead of Tesla. Total global sales of electric vehicles in 2019 was around 2 million, accounting for just 2.6% of global auto sales in the year, according to estimates by the International Energy Agency. .

Evaluation matters

Despite Tesla’s strong momentum in vehicle sales and its huge growth opportunity, there is a major factor that makes the automaker’s shares less attractive today than they appear at first glance. After ramping up 750% and more, the stock’s valuation has stretched, even when compared to bullish prospects for the company.

Image source: Getty Images.

With the stocks trading around $ 1,888, the stock’s market cap is $ 352 billion. Still, Tesla’s free cash flow over the past 12 months is only $ 800 million. With a premium like this, investors have essentially valued an average year-over-year compound revenue growth of 20% to 35% and substantial improvements in profitability for a decade or more. In other words, Tesla’s stock can now be priced perfectly.

Of course, there is always a possibility that the underlying activity will continue to exceed these high expectations, which makes the current stock price look good in hindsight. But investors should keep in mind that the stock’s sizzling rise has made stocks much less attractive recently than they were just a few months ago.

While an upcoming five-to-one stock split may have sparked more interest in the company for now, investors should always keep valuation in mind when investing. It’s unclear when the market can decide to price Tesla stock more reasonably. And if that day does come, it’s possible that the automaker’s investors will never again choose to pay such a large premium for Tesla’s free cash flow, ultimately inhibiting long-term ROI from those levels. .