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Wall Street's 'dean of valuation' makes a surprising call on Tesla

  • The stock is often considered one of the prime examples of overvaluation in the stock market.
  • Aswath Damodaran of New York University Stern School of Business said in a recent interview that it may have a way to justify its valuation.
  • The company has reported a loss of $887 million in the four most recent quarters.

Tesla is often considered one of the prime examples of overvaluation in the stock market.

With a market capitalization of around $50 billion and a share price of more than $300, the stock has risen more than 40 percent so far this year even as it has lost $887 million in the four most recent quarters and has been able to sell a fraction of the vehicles delivered annually by other automakers.

That's where Aswath Damodaran, professor of finance at New York University Stern School of Business, comes in. In a recent interview, the valuation expert said there may in fact be a way to justify its valuation that has recently surpassed that of Ford and General Motors.

"I think there are two games going on with Tesla. There's a pricing game, which obviously is driven by mood and momentum and that's been pushing Tesla up," Damodaran acknowledged. Yet there's also "a value game, and I'm going to surprise you. While I wouldn't buy Tesla at $295 or $300 [per share] there are plausible ways of getting there," he said in a Thursday interview on CNBC's "Trading Nation." He is often referred to as Wall Street's "dean of valuation."

Damodaran said he is uncertain about the company's ability to deliver on some of its promises that may justify its valuation, but he "wouldn't put it past" CEO Elon Musk.

"They have to deliver about $100 billion in revenue in a decade. They've got to be able to do that while delivering tech company margins and investing like a tech company. Can they pull it off? Some people seem to believe they can. I am skeptical, but I think there is a way to get to that valuation," he said.

Tesla has been called a "story stock," defying traditional metrics of measuring a company's valuation given its potential for growth. Its shares have surged 44 percent this year. But analysts, on average, give the company a hold rating and a median price target that implies substantial downside.

Tesla has reported a loss per share in 9 of the past 10 quarters. The company said in its quarterly earnings report this week that a record number of deliveries boosted sales in the first quarter.

"They're an automaker. Ultimately, cars have to roll off the assembly line. If what they have to spend to build those assembly lines is what a typical automobile company spends, there is no way they're worth $50 billion," he said. "They have to spend way too much to scale up to 100,000 cars, which is roughly where they are now. To a million-plus cars is where they need to be."

Musk may be able to pull off "the impossible," Damodaran said, when it comes to a new way of building cars and perhaps achieving manufacturing goals.

The stock slipped on Thursday after earnings showed a wider-than-expected quarterly loss.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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