Tesla would need to grow earnings at a very high rate over an extended span to justify its current stock multiple

Tesla is soon expected to begin rolling out its robotaxi service.

While Tesla’s stock is down about 28% from its all-time closing high, it is up nearly 20% over the past month. Excitement could be building ahead of the company’s robotaxi launch expected later in June. But before getting too caught up in the promise of the company’s future, investors should ask themselves whether these new innovations are enough to justify the stock’s sky-high valuation.

For some Tesla Inc. enthusiasts, they are. The stock has a forward price-to-earnings ratio of about 153, with the metric measuring how much an investor pays for every dollar the company is expected to earn. It means investors are pricing in big-time growth for Tesla. To put that into perspective, it’s significantly above the two stocks with the largest market capitalizations: Microsoft Corp., which has a forward P/E of about 31, and Nvidia Corp., which has a forward P/E of about 28, according to FactSet data.

But once you start hitting a forward P/E multiple above 50, and certainly above 100, it no longer makes sense to look at the multiple relative to earnings, said Thomas Martin, senior portfolio manager at Globalt Investments. It’s evident that investors are looking past Tesla’s core electric-vehicle business, instead focusing on the company’s potential in autonomous vehicles and with its Optimus humanoid robot. But to justify Tesla’s multiple, the company would need to grow earnings at a very high rate for five to 10 years — say, at a 50% to 70% annual rate, Martin added. And that’s a hard growth rate to maintain.

Even then, Tesla’s valuation is questionable. Take Microsoft and Nvidia, for example. The two companies grew into market caps over $3 trillion, but neither company historically traded at a multiple as high as Tesla’s.

Below is a chart that shows the historical forward P/E of all three companies since 2010.

For those who insist on owning Tesla shares, it might be a good idea to pay attention to the stock’s technicals, since the fundamentals aren’t helpful in the near term.

That said, the stock is already near overbought territory going into the rollout of Tesla’s robotaxi service in Austin, Texas. The stock’s relative strength index, a momentum indicator, is at 62. Measures above 70 are a sign the stock is overbought and would require strong sustained momentum to remain elevated. A key short-term level for the stock is $332, which marks its 20-day moving average, according to Dow Jones Market Data. On a short-term basis, stocks tend to retest that point. So it’s riskier to buy the stock before a pullback to that level, said Bob Lang, founder and chief options analyst at Explosiveoptions.net.

However, if for any reason Tesla’s rollout of driverless taxis isn’t well received by investors, the stock could break below the 20-day moving average, Lang said.

But long-term investors in Tesla’s stock should zoom out from the noise of short-term stock moves. Instead, they should take note of where the stock has seen buyers come in and create a support line, which is at $220, Lang said.

Below is a price chart for Tesla’s stock since January. The marked level shows where price has bounced off of, indicating an area at about $220 where buyers enter to create support for the stock’s price.

Photo: FactSet