Shares of Tesla (NASDAQ:TSLA) have surged recently, briefly crossing $1,000 per share earlier this week. Though shares have pulled back to around $950 more recently, the stock is still notably up more than 120% year to date. This, of course, obliterates the overall market. The S&P 500, for instance, is down 5% so far in 2020.
The growth stock's torrid momentum has likely turned the heads of many investors. Some of those investors may be wondering if they should buy shares. Further, some current shareholders may be wondering if they should take their profits after such an incredible run-up.
Here's a look at Tesla's business and the stock's valuation today to help investors decide whether shares are a buy, sell, or hold.
Why investors are so bullish
Going into 2020, Tesla was seeing incredible growth. Total deliveries had jumped 50% year over year as the company's Model 3 proved to be a hit with consumers around the world. Further, as the year progressed, Tesla importantly demonstrated profitability and accelerated execution.
The story had changed. The company was no longer missing delivery targets, it built a factory in China ahead of schedule, and both product development and business expansion were picking up speed.
But COVID-19-related lockdowns meant the company had to pause production -- first in China and then in the U.S. While China operations quickly came back online, the company's high-volume factory in California was still shut down when the automaker reported its first-quarter results, prompting management to withdraw its guidance for 35%-plus growth in vehicle deliveries in 2020.
However, investors are optimistic, once again, about Tesla's 2020 growth prospects now that the electric-car maker reopened its California operations last month and resumed the ramp-up in production of its March-launched Model Y.
Shares are quite expensive
It's true that Tesla has significant room to continue expanding. The company, for instance, is only just now getting meaningful traction with its lowest-cost vehicle in China. Further, considering the rising popularity of SUVs in both the U.S. and Europe compared to sedans, Tesla's new Model Y crossover has a good shot at eventually outselling the Model 3. This means the Model Y could essentially help double the company's annualized vehicle sales at the lower price range (relative to the higher price range of its Model S and X vehicles) that the Model 3 is already targeting.
This market potential combined with management's recent execution makes the automaker worthy of a premium valuation. But here's the catch: The stock's massive climb recently seems to be pricing in most (if not all) of the company's big potential. Consider that Tesla's current share price puts the automaker's market capitalization at about $175 billion, even though the company only generated approximately $1 billion of free cash flow over the trailing 12 months.
Though Tesla's excellent execution recently makes shares worth holding onto for the long haul (assuming you're willing to endure significant volatility and the risk of a major pullback if Tesla hits any detours), investors who don't own the stock yet may want to hope for a better entry point. A more reasonable price tag for Tesla shares would be a level below $800.
In short, shares currently look more like a hold than they do a buy or a sell.