The assessment from JPMorgan analyst Ryan Brinkman reflects some of the concern on Wall Street for the pace of Tesla's meteoric rise this year, which has added more than 660% to the group's share price and more than half a trillion dollars to the company's market value. Its net income for the third quarter of this year was $337 million.
Brinkman says Tesla shares are "in our view and by virtually every conventional metric not only overvalued but dramatically so", citing a stock price that trades at 1,325 times its long-term PE multiple and 291 times its 2020 estimate.
Brinkman advised clients not to increase their holdings in Tesla to its approximate 1.44% weight in the S&P 500 benchmark, even as the bank itself suggests that index-tracking funds will sell $57 billion worth of shares in other companies in order to gather up Tesla shares before its December 21 entry.
"We have recently fielded a number of calls from long-only investors who are faced with, or shortly will be faced with, the decision of whether or not to buy Tesla shares as the stock is added to the S&P 500 index, given that many funds' performance is evaluated against this benchmark," Brinkman wrote.
"Investors in the past have expressed to us that they do not understand why Tesla shares are rising as much as they are as the stock became included in the indices against which they are benchmarked, they opted anyhow to take it equal weight in their portfolio relative to their benchmark, so as to concentrate on generating alpha in other areas of the market in which they felt they have more of an edge," he added.
Tesla shares were marked 8% lower in early afternoon trading Wednesday to change hands at $598.05 per share, a level that values the Palo Alto, California-based group at around $565 billion.
Tesla has taken full advantage of the stock moves, announcing four different capital raising efforts so far this year, including a $5 billion share sale unveiled yesterday.
It also may be on track to meet its 2020 target of 500,000 car sales, a figure that would require fourth quarter deliveries of 166,000, after data from the China Passenger Car Association showing Tesla shifted 21,604 China-made vehicles in the world's largest car market last month, nearly double the October total and well ahead of the 11,329 sold in September, thanks in part to a resurgence in consumer demand from the COVID-hit economy.
Last month, S&P Dow Jones, which manages equity benchmarks around the world, said it would add Tesla shares to the S&P 500 on December 21, a move that could trigger a collective 73 million in new purchases from investment funds that track the world's most traded index. Tesla shares have risen more than 57% since the November 16 announcement.
Tesla, which became eligible for inclusion following its fourth consecutive quarterly profit over the summer and has a market cap of $608 billion, will sit just ahead of Warren Buffett's Berkshire Hathaway BRK.B and around $200 billion below Facebook FB on the U.S. benchmark.