Musk's Political Stance Isn't The Biggest Risk For Tesla - It's The Sky-High Valuation

Musk is causing troubles for his precious Tesla: The billionaire's controversial political stances have led to a fifth consecutive monthly sales decline for Tesla in the UK, Germany, and Italy in May, while his attacks on Trump-related legislation in the U.S. appear to be making matters worse.

Tesla's stock price has fallen about 28% from its historical highest closing price, however, investors should also notice that the EV maker has risen nearly 20% in the past month. With the company expected to launch its robotaxi in late June, market excitement seems to be heating up. However, before getting overly excited about the future blueprint, is the upcoming Robotaxi really enough to support the current extremely high stock valuation?

For some of Tesla's loyal supporters, the answer is yes. Tesla's current forward price-to-earnings (P/E) ratio is about 153 times that of the price investors are willing to pay for every dollar of future earnings. This reflects the market's high expectations for Tesla's rapid growth in the future. In comparison, the forward P/E ratios of two market giants- Microsoft and Nvidia (NVDA.O)- are about 31 times and 28 times, respectively, according to FactSet.

Thomas Martin, senior portfolio manager at Globalt Investments, said that once a company's forward P/E ratio exceeds 50 times or even 100 times, it can no longer be evaluated using traditional "earnings relative valuation" methods.

Investors have clearly shifted their focus from Tesla's core electric vehicle business to emerging ventures like autonomous driving and the humanoid robot Optimus. However, Martin pointed out that to justify such a valuation level, Tesla would need to maintain an annual profit growth rate of 50% to 70% over the next five to ten years- a pace that is almost impossible to sustain in the long term.

Even so, Tesla's valuation remains questionable. Taking Microsoft (MSFT.O) and Nvidia as examples, both companies have grown into giants with market capitalizations exceeding $3 trillion, but neither has ever experienced valuation multiples as high as Tesla's in their history.

For investors holding Tesla stock, it might be more appropriate to focus on technical indicators in the short term, as fundamentals offer little reference value at this stage.

That said, it's worth noting that as Tesla's robotaxi service is set to launch in Austin, Texas, the stock price is nearing "overbought" territory. According to the Relative Strength Index (RSI), a momentum indicator, Tesla's current RSI stands at 62, while a reading above 70 indicates an "overbought" state. Sustained strong upward momentum would be needed to maintain high levels. Data from Dow Jones Market Data shows that Tesla's 20-day moving average is around $332, serving as a key short-term support level.

Bob Lang, founder, and chief options analyst at Explosiveoptions.net, said that in the short term, stock prices often pull back to test this level, so buying before a retracement to this point carries higher risks.

He added that if Tesla's robotaxi launch underperforms and fails to win investor favor, the stock price could even fall below the 20-day moving average. However, for long-term investors, excessive attention to short-term stock price fluctuations, or "noise", is unnecessary. Lang suggested focusing more on key support zones where buying interest emerges, with the current "bottom support level" around $220.