We recently published a list of 10 High-Valuation Stocks to Buy According to Billionaires. In this article, we are going to take a look at where Tesla, Inc. (NASDAQ:TSLA) stands against other high-valuation stocks to buy according to billionaires.
High-valuation stocks are typically characterized by metrics such as high price-to-earnings (P/E) ratios, price-to-sales ratios, and enterprise value to EBITDA (EV/EBITDA) multiples. These high valuations often mean strong investor confidence in a company’s future growth potential. However, they also imply that the market has priced in substantial future earnings growth, leaving less margin for error if the company fails to meet expectations.
Investing in high-valuation stocks has been a subject of debate among investors for some time. While some investors argue that these stocks are overvalued and pose a risk of correction, others view them as opportunities to gain exposure to industry leading companies with strong growth potential. In the U.S. market, high-valuation stocks are often associated with technology, healthcare, and consumer sectors, where innovation, brand strength, and market dominance justify their premium pricing.
Support for High-Valuation Stocks
The current market environment has been supportive of high-valuation stocks. In a February interview with CNBC, Fidelity Investments’ Director of Global Macro, Jurrien Timmer, noted that the bull market, which is around 28 months old now, has delivered substantial returns. While some market cycles end around the 30-month mark, history shows that many extend further. Strong earnings performance has supported valuations, with 78% of companies beating expectations in the fourth-quarter earnings season.
Echoing this sentiment, in a February discussion on CNBC, Ed Yardeni of Yardeni Research highlighted that while valuations are stretched, the earnings landscape remains strong. He emphasized that stock markets are primarily driven by earnings and valuation dynamics. Even though high-valuation stocks like the “Magnificent Seven” have stopped rising on a valuation basis, their earnings potential continues to look promising. Sectors like AI, robotics, and automation remain key drivers of long-term growth, fuelling investor confidence.
While earnings continue to support valuations, some experts argue that broader macroeconomic conditions play an equally important role. Julian Emanuel, senior managing director at Evercore ISI, provided good context in CNBC’s ‘Closing Bell’ program on March 19. He noted that valuations have moderated from “very expensive” to just “expensive,” suggesting that some of the issues have been factored in. More importantly, he emphasized that valuation alone does not end bull markets. Unlike previous cycles, where an uncooperative Federal Reserve contributed to market downturns, Emanuel believes that the Fed’s expected rate cuts in 2025 will provide continued support. Additionally, he points out that bond yields have remained contained, which reduces competition for equities and supports higher valuations.
Despite concerns over rising bond yields and a maturing economic cycle, the fundamentals of the U.S. economy remain strong. Ed Yardeni pointed to steady employment levels and robust retail sales growth, which suggest that consumer spending remains healthy. As long as corporate earnings continue to support current valuations, the case for investing in high-valuation stocks remains intact.
Risks From Yields and Sector-Specific Issues
That said, these stocks aren’t without risks. One of the biggest risks to high-valuation stocks is the potential for higher interest rates. Research has pointed out that if long-term yields rise above 5%, it could create more competition for equities. When risk-free returns from government bonds become more attractive, investors may demand higher risk premiums from stocks, leading to valuation corrections.
Additionally, sector-specific challenges can impact high-valuation stocks. For example, companies in the artificial intelligence (AI) and cloud computing sectors, have generally received high valuations based on growth expectations. When expectations are reset due to some sector dynamics, these stocks often tend to correct first.
Investors looking to invest in high-valuation stocks should focus on companies with strong fundamentals and long-term growth drivers. Companies with dominant market positions, innovative product offerings, and recurring revenue models tend to justify their premium valuations.
Our Methodology
To identify the 10 high-valuation stocks favoured by billionaires, we began by using online stock screeners to filter companies trading at a forward price-to-earnings (P/E) ratio between 50 and 150, as valuations above this range tend to carry higher risk due to elevated growth expectations. Next, we analyzed Insider Monkey’s database of billionaire holdings to determine which of these high-valuation stocks were most favoured by billionaire investors. Finally, we ranked top 10 of the shortlisted stocks in ascending order based on the number of billionaire investors holding stakes in each company as of Q4 2024. Additionally, we provided insights into hedge fund sentiment surrounding these stocks using Insider Monkey’s Q4 2024 hedge fund holdings database.
Note: All pricing data is as of market close on March 21.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Tesla, Inc. (NASDAQ:TSLA)
Forward P/E: 89.3
Number of Billionaire Investors: 21
Number of Hedge Fund Holders: 126
Tesla, Inc. (NASDAQ:TSLA) is an electric vehicle (EV) manufacturer and clean energy company known for its innovative approach to sustainable transportation and energy solutions. It designs, manufactures, and sells electric vehicles, battery energy storage systems, solar products, and related services. It currently manufactures five different consumer vehicles: the Model 3, Y, S, X, and the Cybertruck. Its strong presence in EV technology, autonomous driving, and AI positions it as a tech-driven company rather than just an automaker.
Since the new U.S. president took office on January 20, Tesla Inc. (NASDAQ:TSLA) shares have dropped by as much as 50%. A key reason behind this decline has been investor concerns about CEO Elon Musk’s increasing involvement with the Department of Government Efficiency (DOGE), raising fears that it could be diverting his attention from Tesla. Additionally, declining sales and market volatility have added pressure on the stock.
Acknowledging these challenges, Morgan Stanley analyst Adam Jonas lowered his price target on Tesla Inc. (NASDAQ:TSLA) from $430 to $410 but maintained an Overweight rating in his March 21 report. He noted that while Tesla’s auto deliveries in 2024 have been weaker than expected, this does not alter the overall investment outlook. The analyst believes that Tesla’s current slowdown is part of a transition from being a pure-play automaker to a broader AI and robotics company. Despite the volatility and non-linear progress, he remains confident that 2025 will be a year where investors increasingly recognize Tesla Inc. (NASDAQ:TSLA)’s leadership in embodied AI, an area where he sees the company maintaining a strong competitive edge.
Overall, TSLA ranks 1st on our list of high-valuation stocks to buy according to billionaires. While we acknowledge the potential of TSLA to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TSLA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
