'Not only overvalued, but dramatically so': Tesla stock should be avoided ahead of the automaker's S&P 500 inclusion, JPMorgan says

• Investors looking to buy Tesla shares ahead of its S&P 500 inclusion should wait until shares fall back to earth, JPMorgan analysts said Wednesday.
• The automaker has rallied more than 660% through 2020 amid analyst upgrades, strong earnings, and investor bullishness, but JPMorgan advised clients to avoid raising stakes in the company as its share price far outpaces fundamentals.
• Tesla stock is "in our view and by virtually every conventional metric not only overvalued, but dramatically so," the team led by Ryan Brinkman said.
• The analysts lifted their price target to $90 from $80, implying an 86% plunge from Tuesday's close over the next 12 months.
• Watch Tesla trade live here.

Tesla's upcoming inclusion in the S&P 500 has investors considering taking an equal-weight position in the stock. JPMorgan advises they wait.

The automaker's shares have surged more than 660% in 2020 amid strong earnings, analyst upgrades, and overwhelming investor optimism. The company's addition to the benchmark index on December 21 is the latest driver for its mammoth rally.

JPMorgan analysts led by Ryan Brinkman said Wednesday that the bank had taken several calls from investors wondering whether the inclusion should spur new buying. Though Tesla's plan to sell shares should aid the company, the bank recommended investors avoid scooping up more shares until the stock's price falls in line with its fundamentals.

"Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so," the analysts wrote in a note to clients.

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JPMorgan lifted its price target to $90 from $80, implying an 86% plunge from Tuesday's close over the next 12 months. The bank maintained an "underweight" rating on Tesla stock.

Before taking a Tesla position equal to its upcoming S&P 500 weighting, investors should weigh the company's rally against tumbling earnings expectations, JPMorgan said. Shares are up more than 800% over the past two years, but in the same period analysts lowered their earnings forecasts for every year from 2020 to 2024.

The dueling trends suggest Tesla's surging stock price might be driven more by "speculative fervor" than the company's recent performance, the analysts said.

If investors work backward and try to justify Tesla's current market cap, bullish arguments still butt heads with reality, they added. The company's market cap exceeds the combined valuation of Volkswagen and Toyota, but Tesla's sold only 400,000 vehicles in 2019 to the two automakers' 21.8 million.

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If Tesla's valuation assumes it will sell twice as many cars as Volkswagen and Toyota combined, it would require "a seemingly improbably high market share," the analysts said.

Focusing on margin improvement instead yields a similarly difficult target. If Tesla were to try to match Volkswagen and Toyota's combined output, its current valuation would still require margins twice as high, JPMorgan said.

"You can play with the numbers any way you like, but one or the other of the required assumptions still seems very difficult to conceive in any imagined scenario," the analysts said, adding that such hypotheticals justify only Tesla's current price and not the potential upside.

Tesla traded at $635.86 per share as of 11:40 a.m. ET. The company has 22 "buy" ratings, 42 "hold" ratings, and 20 "sell" ratings from analysts.

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