Tesla is Too Risky a Bet for Most Investors Says Michael Farr

Tesla shares have exploded in 2020 to stupid high prices before the stock split.

It was this month that the electric vehicle giant was added to the S&P 500 Index. Shares have seen a growth of 690% this year and the company has a market cap of almost $617 billion.

Even at its current price share prices may be too risky for most investors however, says Michael Farr, a CNBC contributor and president of the DC investment advisory firm.

Farr has wrote that there is “no law prohibiting stupidly expensive from becoming moronically expensive. Moreover, speculative companies that actually achieve explosive sales and profit growth for a number of years can actually make outlandish valuations seem justified for a time.”

Farr believes the current valuation makes Tesla the sixth-largest company in the S&P 500, and by any metric, shares of this company are expensive.

He explains that the price-to-earnings multiple for the overall S&P 500 is currently about 22.3 times the consensus earnings estimate for 2021. Tesla shares are trading at more than 168 times.

Farr goes on to note that even though Tesla’s earnings are projected to grow at a rapid pace over the next several years, shares are still priced at 77 times the consensus 2024 estimate.

He also points out that the average price-to-sales ratio for the S&P 500 is 2.7x while Tesla is at over 13x.

Farr doesn’t disagree though that Tesla may still head higher. “The company is now worth more than double the combined market valuations of Ford, GM and Toyota! Could it someday be worth triple? Maybe,” he wrote.

Recently “Mad Money” host Jim Cramer said, “Tesla is the stock that broke how we view stocks. It’s a totally unconventional way to look at stocks, and younger people look at a company that can make a battery and they dream dreams. They don’t go with the spreadsheet. They see things that we don’t see.”

Disclaimer: We have no position in any of the companies mentioned and have not been compensated for this article.