Growth stocks are all the rage these days. Even during the coronavirus-induced recession, growth stocks like Tesla Inc. (TSLA) continue to fire on all cylinders. Fueled by historically low-interest rates and historic intervention by the Federal Reserve to inject liquidity into the financial markets, asset prices continue to rise, particularly when it comes to premier growth stocks such as Tesla.

Tesla is now eligible to join the S&P 500, and many institutional investors have made Tesla among their top holdings. One of them is Prelude Capital Management, a New York-based hedge fund. The company oversees $5.45 billion of assets and has taken a huge position in Tesla, worth approximately $110 million.

But while Tesla is a hedge-fund favorite nowadays, risk-averse investors should continue to steer clear of this highly speculative stock.

Putting Growth Into First Gear  

The fund holds an enormous position in Tesla. Valued at nearly $110 million during the company's filing, the company occupies almost 20% of the equities' weight. However, the company's exposure is offset by an equally significant short position on the company, value at around $70 million. Management has likely attempted a long straddle or long strangle option strategy. Still, the fund would benefit amid Telsa's stock appreciating, being long in the stock.

Tesla reported second-quarter earnings on July 22nd, with results beating expectations on the top and bottom lines, impressing the investment community during a global pandemic. Total revenue was down -5% year-over-year to $6 billion but beat estimates by nearly half a billion dollars. Automotive gross margin improved markedly year-over-year as well, rising from 18.9% in the year-ago period to 25.4% of revenue. This was essentially in line with Q1’s automotive gross margin value of 25.5% of revenue.

Tesla said it expects to deliver 500,000 vehicles this year, as it continues to ramp up capacity to meet rising demand. It also said it expects its new semi-truck to begin deliveries in 2021. Tesla posted its fourth consecutive quarter of profit, earning $2.18 per share on an adjusted basis in Q2.

Not A Buy At Any Price

Investors have a tendency to dismiss valuation during bull markets. It is easy to understand this behavior, as the lure of such rapid capital appreciation from growth stocks makes it fairly easy to throw caution to the wind. And while Tesla’s valuation has hardly mattered to the stock price performance to this point, it may not always be this way.

Tesla stock now has a market capitalization of $300 billion, making it the most valuable car company in the world. In fact, Tesla’s current market cap is higher than Ford (F), General Motors (GM), Toyota (TM) and Honda (HMC) combined.

From this perspective, it seems obvious that Tesla is significantly overvalued. Even if investors assume a very high future growth rate in revenue and earnings, it may be difficult for Tesla to justify its current valuation. This was the exact setup behind the bursting of the “tech bubble” in 1999 that led to a decade-long stagnation for tech stocks.

And, with inconsistent profitability, Tesla will also likely never pay a dividend, for investors interested in generating income from their stocks. Investors should keep this in mind before buying Tesla, as only the most risk-tolerant should even consider buying the stock right now.