(Tesla) (TSLA)
Overview of the Company - The famed Tesla. The top performing stock in the S&P 500 in 2020 - up over 700%. As one of the newest additions to the S&P 500 it has grown into its new home very nicely. Now, with the 7th largest market cap in the world Tesla has proved to be the biggest automotive company in the world. (even if they are also a tech company simultaneously) Tesla’s market capitalization has multiplied eightfold since the pandemic bottom. The S&P is hovering around a double. It is clear that Tesla has beat the shorts profoundly, and have proved themselves to be a profitable and legitimate mega company. Additionally to making cars, Tesla has their massive supercharger network, solar infrastructure and auto driving tech that keeps getting better. This company trades like a tech company for good reason.
Fundamental Analysis - Tesla obviously has their car business going for them, but I think where they differentiate themselves from their competitors is in their battery and self driving tech. Not only do they already have the infrastructure to mass produce electric cars at a cheaper price than any other car manufacturer, they also have superior battery technology. Their self-driving tech can also change how we think about transportation. Uber realized the power of this technology and is racing to develop their own technology as well. Tesla is a disruptor in multiple industries. The massive growth potential with Tesla is why it can justify trading at such an insane Price to Earnings ratio and maintain its gargantuan market cap.
How (TSLA) Stacks Up to Competitors - We will be comparing Tesla to more traditional car companies, but it will be important to note that the reason why Tesla trades at a premium to the market is because it has the technology to do so. Now let's get into the comparisons. General Motors (GM) is an auto manufacturer and operates under these brand names: Buick, Cadillac, Chevrolet, GMC. Volkswagen (VWAGY) is likewise an automotive manufacturer and operates under these brand names: Audi, Bentley, Porsche, Volkswagen Commercial Vehicles, Lamborghini, Ducati, and Bugatti. GM and VWAGY have very similar profit margins, while TSLA lags in the group. Volkwagen’s quarterly revenue growth (YOY) is around 60% while General Motors and Tesla is around 100%. However, it earnings is where Tesla really differentiates itself from rivals. With a lot of the infrastructure needed to produce cars paying off, and the massive demand discovered this year, Tesla had a quarterly (YOY) earnings growth of around 1,000% - that will justify its pricing at 400x earnings currently. The added benefit of being so profitable and new compared to the other companies is that they don't have a huge debt burden. While Tesla has more cash than debt, GM and VWAGY both have 4-5 times debt to cash ratio.
Bull Case - Tesla’s tech continues to surprise and justify their valuation and multiple. As Tesla opens up more factories to meet the incredible demand for electric cars, they will continue to make money off their core business. Tesla’s brand name and extremely devoted following will create a base for the business that Elon Musk will continue to build on. In the near future with electric cars being more prevalent and self-driving tech more widely adopted - Tesla will be in an incredibly lucrative earnings environment.
Bear Case - New competitors from Rivian to Lucid and even the old giants like Ford, GM and VWAGY will create increasing competition for Tesla. If just some of these companies take market share away, it will be clear that Tesla will not be able to trade at their current multiple, bringing the stock down. Tesla's autopilot technology is unproven and decades off wide adoption. Tesla could not survive without federal incentives, effectively forcing investors to rely on the government to continue to fund electric car companies like Tesla. Tesla does have its core base, but there are many consumers that are looking for something new, or simply will never see themselves in an electric car. As we go forward, it will be clear that Tesla operates in more of a niche market that many investors realize.
Valuation and My Price Target - After the outrageous beat on earnings last quarter, Tesla has increased expectations, but I believe they will meet them. We saw another glimpse of Tesla beating expectations last Friday - 10/1 when Tesla reported deliveries for the quarter. Expectations were around 220,000 cars, Tesla reported delivering 240,000. I believe that surprises like this will continue to transfer into earnings. I believe we will see earnings next quarter of about $1.60 and my EPS estimate for Tesla this next year is $6.75. I do believe that during the next year will see some multiple compression, as sustaining a 400x multiple is highly unlikely. That being said, with its EPS of $6.75 and TESLA trading at 200x, my price target comes to $1,350. This indicates around 73% upside.
The Verdict - BUY HOLD SELL
Tesla is a hard company to value, as it trades at such high valuations, but has aspects and technology that seem to justify it. I believe that Tesla's massive infrastructure and low debt will really help the company in the long run. I believe that even though there are increasingly surprising amounts of potential competitors, no one can come close to mass producing electric cars at a sustainable price like Tesla can. Not to mention their battery and self driving technology that can be applicable to other markets, Tesla is certainly a attractive investment. With predicted annual returns of 73%, I believe that Tesla is currently a BUY.
*all data provided by yahoo finance and nasdaq.com