Actions of You’re here (NASDAQ: TSLA) jumped 8% to another all-time high on Thursday, in part thanks to a major upgrade by auto analyst Joseph Spak of RBC Capital Markets. The stock continued to soar on Friday. Spak raised its rating for Tesla stock to be outperforming the sector (the equivalent of an expectation) versus underperforming (the equivalent of a sell). During that time, he more than doubled his price target to $ 700.

The analyst gave two main reasons for this change of mind: Tesla’s ability to raise capital at lower cost and increased expectations for growth over the next five years. However, neither of the two justifications makes sense. Instead, it looks like another case of an analyst chasing Tesla stock, which has moved far into bubble territory after surging more than 800% in the past year.

Tesla share performance. Data by YCharts.

Mixed expectations for growth

Along with the upgrade, RBC increased its estimate of Tesla’s vehicle deliveries in 2025 to 1.7 million, from a previous forecast of 1.3 million. Yet the new estimate still implies a marked slowdown in Tesla’s growth path over the next few years.

Tesla reported last weekend that he delivered 499,550 cars in 2020 – up 36% year-over-year – despite a production shutdown of about two months at its main plant due to the COVID-19 pandemic. Tesla had an installed capacity to build 840,000 vehicles per year a few months ago, with more capacity underway. During the company’s third-quarter earnings call, an analyst asked if that means Tesla is likely to deliver 840,000 or more vehicles in 2021. Elon Musk agreed that was a reasonable estimate. .

Based on 840,000 deliveries in 2021, Spak’s 2025 delivery target implies a compound annual growth rate of 19% over the next four years. For comparison, Musk has targeted annual growth of 50%, Roughly speaking. So far, it has mostly achieved this goal. At this growth rate, Tesla would deliver around 4 million vehicles in 2025.

It would be one thing for Spak and his team to argue that Tesla stock is worth more than the rest of the world. automobile industry combined if they expected the business to continue growing at an annual rate of 40-50% for the foreseeable future. But there is no plausible argument for giving Tesla stock such a high valuation based on RBC’s targets, implying that the electric vehicle pioneer would still hold less than 3% of the global market share. in 2025, growth slowing rapidly by then.

A circular argument on valuation

RBC analysts also noted that Tesla was able to raise capital at very low prices by selling stocks in 2020. They see this low cost of capital as a huge competitive advantage that justifies a high valuation of eight times 2025 sales for Tesla shares. The reason is that Tesla will be able to use its stocks to fund growth investments and acquisitions, rather than having to rely on internally generated cash flow.

However, this argument is clearly based on a circular logic: Tesla has a high stock price, and this high stock price allows it to raise capital at a lower cost; therefore, Tesla deserves a high rating.) If Tesla stock were to fall 75% for some reason – or no reason at all – the argument would work backwards. The sharp drop in Tesla’s share price would mean that the company could no longer raise capital so cheaply, justifying a low share price.

A warning sign for Tesla stock?

With aggressive assumptions about Tesla’s future market share, the profitability of electric vehicle production relative to traditional car manufacturing, and the potential for ancillary business opportunities, it might be possible to justify Tesla’s high valuation. Following the recent stock surge, Tesla’s fully diluted market cap is approaching $ 1 trillion.

However, Spak and his team of RBC analysts expect Tesla’s growth to slow significantly in the coming years, based on their updated estimate of 1.7 million deliveries in 2025. So, the brokerage’s price recommendation and target seem completely detached from fundamental analysis. Increasingly, analysts appear to be chasing Tesla’s stock price, raising their targets simply because the stock has skyrocketed.

This logic can go both ways. Tesla looks like a bubble rising from pure momentum and fear of missing out. When that bubble bursts, Tesla stock could take a dramatic dip. This pullback could be compounded by a wave of trend downgrades by the same analysts who have rushed to raise their price targets in recent months.