The analyst cautions Tesla’s valuation amid divergent outlooks.

(SeaPRwire) –   On Monday, J.P. Morgan analyst Ryan Brinkman released a report on Tesla that is highly unusual for Wall Street. Brinkman stated that at its current price of $361, the electric vehicle manufacturer is significantly overvalued. He projects that based on its declining financial performance by the end of this year, Tesla’s stock is worth only $145, indicating a potential 60% drop.

For years, the author has argued that Tesla’s substantial valuation, currently at $1.3 trillion, is largely due to the “Elon Musk magic premium.” This premium stems from his long-term supporters investing in promises of highly profitable future products that Musk and Tesla have yet to successfully commercialize. Simply put, it appears impossible for Tesla to increase its current minimal profits quickly enough to justify a market capitalization starting at $1.3 trillion, as this figure would need to grow rapidly to provide investors with a satisfactory return.

This sentiment is largely echoed by Brinkman. To call his position “contrarian” would be an understatement. In his latest report, Brinkman highlights Tesla’s disappointing first-quarter deliveries of just 358,000 vehicles. He uses this figure to emphasize the significant and widening gap between the market’s overly optimistic expectations and Tesla’s actual underwhelming performance.

Brinkman points out that in June 2022, when analyst consensus for Tesla’s car sales peaked, the community projected unit deliveries to reach 1.366 million by the first quarter of this year. The actual number fell short by over 1 million, or 71%. Since that June 2022 prediction, Wall Street’s forecasts for revenues and profits have consistently decreased, yet Tesla’s share price has increased by 50%. Currently, according to Bloomberg, the consensus among Wall Street analysts is that Tesla is still undervalued, with expectations for its shares to rise 15% to $416 over the next twelve months.

Brinkman advises “a high degree of caution, mindful of execution risk and the time value of money within the context of distant out-year earnings expectations implied by the rise in TSLA’s share price that has occurred alongside a collapse in consensus for all performance metrics.” He explains that Tesla is essentially shifting its focus from the declining EV market to two new sectors: autonomous driving, including robotaxis and self-driving software, and robotics. Tesla announced during its January earnings call that this transformation will require $20 billion in capital expenditures by 2026, and this figure could be even higher due to plans for its Terra-Fab plant in Fremont, California, to produce advanced in-house software for its new product line.

As Brinkman notes, it is unclear where the funding for these planned investments will originate. Last year, Tesla’s capital expenditures amounted to $8.5 billion, with approximately $1.6 billion derived from the sale of regulatory credits. Musk has acknowledged that this revenue stream will diminish due to changes in U.S. energy and tax policy under President Trump. Consequently, Tesla will need to fund between $11 billion and $12 billion more in plant and equipment this year compared to last. Brinkman warns that Tesla risks generating meager returns on the substantial new capital being added to its balance sheet. The reason is that, unlike early-stage EVs, both of its new ventures face intense competition from established players. Alphabet’s Waymo has already deployed robotaxis across the United States, and the robotics sector includes numerous companies such as Apptronik and Boston Dynamics in the U.S., and Unitree and Agibot in China.

Brinkman highlights that in June 2022, analysts projected Tesla would generate $35.7 billion in free cash flow this year. Today, they forecast a cash outflow of nearly $5 billion, largely attributed to the significant new capital expenditure requirements.

Even Brinkman’s numbers may be too rosy

Brinkman deserves significant recognition for finally bringing a grounded, objective, and data-driven analysis to Tesla’s prospects. However, the question remains whether even a price drop exceeding two-thirds would be sufficient to make its shares a sound investment or even reasonably valued. Brinkman estimates net earnings of $6.5 billion for this year. At his target price of $145 per share, Tesla’s market capitalization would decrease from the current $1.3 trillion to under $500 billion. Yet, even at this reduced valuation, how much earnings would a new investor receive for every $100 invested in Tesla? Its price-to-earnings ratio would be considerably lower than the current figure of around 200, but would still stand at a substantial 77 (calculated by dividing a $500 billion market cap by $6.5 billion in net profits). This would mean an investor would receive only $1.30 in profit for every $100 invested in shares.

This valuation multiple would position Tesla as by far the most expensive stock among the “Magnificent 7” group. To justify the price investors paid, assuming a 10% annual return, Tesla would need to regain its $1 trillion market cap within seven years and achieve annual earnings of approximately $40 billion. Investors face a choice: follow the mathematical projections or Musk’s vague vision, which constantly shifts further into the future. Brinkman asserts that while Musk’s charisma can create a temporary shield, mathematics ultimately prevails. Despite having most of Wall Street against him, Brinkman is supported by facts and figures.