Tesla stock analysis by Pure Climate Stocks

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Tesla stock analysis: A one-way ticket to riches or grossly overvalued?

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Matthias Krey

Tesla is a phenomenon. Tesla’s mission is “to accelerate the world’s transition to sustainable energy.” For a long time, they were mocked, and its collapse was predicted, but then their value increased tremendously in a matter of months. Tesla, in reality, has pushed the bounds of what was thought to be achievable and has now sold over a million electric vehicles, leaving competitors to see only Tesla’s taillights. Elon Musk, the CEO of Tesla, is known for walking the delicate line between genius and craziness and attracting attention.

Tesla is, without a doubt, the most valuable automobile company on the planet today and is more valuable than all of Germany’s vehicle manufacturers combined.

The Tesla stock is one of the most divisive in the market today, with some viewing Tesla as the next Apple, a multibillion-dollar conglomerate far superior to any other vehicle manufacturer. Others previously said Tesla was overvalued, and they are now reiterating the overvalued argument even more.

There are plenty of reasons to analyze the stock and determine whether it is currently a suitable investment. This analysis will reveal, among other things:

  • Why is Tesla a Pure Climate Stock?
  • What is Tesla’s current financial performance?
  • What makes the business model so strong, especially compared to its competitors, and how does it work?
  • Tesla’s advantages, disadvantages, prospects, and risks are compared.
  • What seems a fair value for Tesla, and is the stock currently worth buying?

Table of Contents

Table of Contents

Business Overview

Let’s first get an overview of the company and understand why Tesla is a Pure Climate Stock.

Basics of Tesla stock analysis

Tesla was founded by its current CEO, Elon Musk, in Palo Alto, California, in 2003. Musk was previously involved in PayPal’s IPO and is currently sending rockets into space through his company SpaceX, drilling tunnels, and much more.

Business model

Tesla is a company that offers electric vehicles, its own charging stations, and battery manufacturing facilities. Trucks will be added to their portfolio in the near future.

Apart from their primary source of revenue coming from electric vehicle sales, Tesla also runs a profitable energy storage and solar business. The solar business comprises of three main products, namely:

  • Solar
  • Megapack utility storage unit
  • Powerwall storage device for businesses and homes

Size and valuation

By market capitalization, Tesla is the leading automobile manufacturer worldwide, with about $710 billion. There is a substantial gap between first and second place, as Toyota is the second largest with a market cap of about $252 billion.

Other popular competitors include Volkswagen (third), valued at about $158 billion, while Ford (fourteenth) has about $54 billion.

Why is Tesla a Pure Climate Stock?

There is as much controversy around the company Tesla and its CEO Elon Musk as it is about the climate impact of its business model. Tesla’s EVs need energy to run on. The engines are powered by a battery that has been charged (in most cases) with grid electricity that is not fossil-free. Can Tesla still be considered a climate pure-play stock? Following our Pure Climate Stocks Methodology, Tesla is a climate-friendly stock. The company makes 100% of its revenue from producing and selling EVs and solar home solutions for charging them. Although the cars’ batteries are not yet energized by 100% fossil-fuel-free renewable electricity, EVs are essential to replacing CO2 emissions from petrol consumption in individual transportation. In most countries, EVs already emit less CO2 than conventional cars.

If we look at countries like Sweden, EVs already outperform conventional automobiles by roughly 77%. As the EU economy decarbonizes, electric cars will become significantly cleaner in all EU member states in the coming years, with average EVs being more than four times cleaner than conventional counterparts by 2030.

Tesla stock analysis

Source: EU Transport & Environment (2020)

Also, in the US and most other countries worldwide, driving an electric car is equivalent or better concerning the climate than a conventional model.
As the share of fossil-free renewable electricity in electricity grids will further rise globally as part of countries’ decarbonization efforts towards a carbon-neutral world, carbon emissions from Tesla’s EVs will be lower.

Factsheet

Share price development

Over the last few years, the stock price has risen dramatically. However, from the end of 2019 to now, the price climbed fivefold then dropped nearly in half, which was the deciding factor. Since July 2021, the share price has slowly been rising again.

Picture2

Source: Bloomberg (2021)

Key figures

Unless otherwise stated, all figures are USD and trailing twelve months (TTM). Addition ‘(e)’ = expected in the current year.

Key data:

  • Market Capitalization: $710 billion
  • Revenue: $11.958 billion
    • From cars: 85%
    • From solar and energy business: 6.69%
  • Cars sold: 703 900
  • Profit: $9.228 billion
  • Free cash flow: $2.614 billion
  • Country: USA

Rating:

  • P/S ratio: 17.3
  • P/E ratio: 375.9
  • P/E ratio (e): 151.0
  • P/CF ratio: 260.1
  • PEG ratio: 5.1

Growth & debt

  • D/E ratio: 31%
  • Gross margin: 22%
  • Revenue growth (last 3 years): 45% p.a.

5 Facts about Tesla

2.1

Business breakdown: business model & strategy analyzed

Let’s look at Tesla’s business model and strategy in more detail:

Is Tesla earning stable profits? – Revenue and income analysis

The following graph depicts the growth of sales, profit, and cash flow. It’s worth mentioning that the last point (TTM) represents the previous 12 months and is quite similar to the previous year.

img 2 02

Source: Tesla financial reports and own calculations

There is tremendous sales growth, a gross margin of about 20%. Although there were consistent net losses until 2019, Tesla is profitable since Q3 2019. Since 2018, the free cash flow has been positive. This means that since 2018, the company has received more money than it has expended.

This is compelling because Tesla has long been and continues to be criticized for wasting money. Aside from almost every tech company often incorrectly being accused of this, the indications point to rising profitability. In the absence of other external risk factors, a risk of bankruptcy owing to the earnings condition is unlikely.

img 3 01

By Q2 2021, the number of cars sold had developed quite proportionally to sales.

Sales increased by 67% in 2017, 82% in 2018, 15% in 2019, and 28% in 2020 on a full-year basis. The introduction of the Tesla Model 3 and its series production were the key drivers of growth in 2018. In fact, the car is the world’s best-selling plug-in electric vehicle. In Q2 2021, Tesla faced barriers to accessing enough modules that control the airbags and seatbelts in Tesla vehicles. A shortage of supplies hampered the company’s manufacturing in California and Shanghai. Despite supply shortages, gross profit was up a staggering 128% year on year (YoY).

Tesla makes money by selling and leasing automobiles and providing solar panels and other energy services. However, the auto segment dominates both in absolute terms and in growth terms, as shown in the graph below:

img 2 01

The EU requires automakers to average no more than 95 g of CO2 per kilometer. Those not complying need to pay heavy penalties or can buy credits from others that have overperformed. Tesla received these credits for free because it only sells electric cars and could resell them at a high profit to other automakers who couldn’t meet regulatory standards. The company was accused of only making a profit because of those deals. But, Tesla no longer relies on selling emission permits to make money as it formerly did. Even without accounting for the sale of emissions credits to other manufacturers, Tesla sold enough cars and energy products to profit in Q2 2021.

Only 3% ($354 million) came from credit sales, with the rest from the core business.

Tesla also claims to have made $101 million from bitcoin sales in Q1 2021. They revealed in January to having purchased $1.5 billion in bitcoin and had begun accepting bitcoin as payment for cars (but recently reversed the decision). Because the price of bitcoins fell by more than 40% in Q2, Tesla’s assets would be worth significantly less these days.

Despite everything, Tesla still managed to make a profit in Q2 of $1.1 billion.

What is the business model and strategy?

The basic concept of all business models in the automation industry is making cars and selling them. What makes Tesla unique is that they are at the forefront of manufacturing and selling electric vehicles, and their success is dependent on this trend. It is both an obstacle and an opportunity for the company.

So what is Tesla’s strategy?

The core of Tesla’s business is in the vehicle market, and it all started with their premium Model S. In 2015, They became a real competition when sales boomed in 2018 with their upper-middle-class car, the Model 3. Its competition included the Mercedes C-Class, General Motors C-Class Sedan, and the 3-series BMW. Since then, we have seen Tesla’s Cybertruck, an SUV, and Model 3. All of which have been successful.

They produce their vehicles and battery production as well, which is known as “gigafactories.” These gigafactories are located in various cities worldwide, including Shanghai, Berlin, Netherlands, and Nevada, and Buffalo in the United States. In addition, Tesla has taken over their battery production and is considered a leader in manufacturing high-quality batteries, visible in their range of charging speeds in their vehicles.

In addition to their battery and vehicle production, Tesla is considered a leader in developing the software for self-driving cars and distributes their charging stations, also known as “superchargers,” worldwide. There are approximately 2,500 of Tesla’s superchargers, and the number is growing.

Tesla has also developed the innovative “Tesla Energy.” It is the latest innovation in solar electricity production and storage. 7% of the sales already come from that source which is highly synergistic with the EV business. In addition, Tesla is firm on entering the truck market with Tesla Semi Trucks to improve its range and software.

Market analysis

Market size and competitors

The future of Tesla’s success is dependent on the competition. More than 90 million cars are sold each year, and growth in the market is increasing at a similar rate as the global economy – 2%-3% yearly. It is also quite cyclical, as shown by the decline during the corona crisis.

Picture3

Source: Knoema (2021)

Let’s take a look at how Tesla is doing compared to the competition in the relevant indicators.

1.2.3 01

An amazing fact: today, you could buy Volkswagen (which also includes Audi, Porsche, Seat, Skoda, Lamborghini, and Bentley), Ford, and Toyota – for about $ 456 billion. That would still be $356 billion cheaper than just buying Tesla ($692 billion market value).

Drivers and outlook for the EV market

It is no secret that Tesla is the leader in the electric vehicle market. EVs are the future of the industry and will continue to grow exponentially.

There are constant debates regarding how good electromobility is, when a longer range will be available, and whether hydrogen is suited for automobiles. However, it can be believed that the market is currently experiencing some of the following theses:

  • Electromobility seems to become the new standard in car manufacturing. The outlook for the technology is very bullish in the medium and long term. Several countries have announced or are considering bans of petrol and diesel cars or implementing plans of 100% zero-emissions latest by 2040. This includes China, Japan, several US states, Canada, and the main EU member states like Germany, France, and Spain. All the big car manufacturers are focusing on EV expansion and, for the moment, regard hydrogen technology as a secondary solution for passenger cars.
  • Electromobility has made great strides in terms of range, battery capacity, charging speed, supply, and infrastructure. In contrast, combustion engines are still advancing in the per-mile range (also due to increasingly stringent environmental regulations).
  • Tesla is well-positioned as a market leader and vertical integration (automobile and battery manufacturer and infrastructure owner), but the competition is closing the gap.

The global electric car market has grown rapidly, accounting for roughly 2.5% of all cars sold worldwide. The graph below depicts the progression up to 2019.

Picture5

Source: McKinsey & Company (2021)

The market is rose dramatically in 2020. From 2019, the global market share of electric vehicles nearly doubled, reaching 4.6%. Buying incentives in selected EU member states, which are part of the countries’ economic recovery initiatives, were a major factor.

The market for electric vehicles is developing at a rate of roughly 50% each year on average:

Picture6

Source: Virta (2021)

It is not only electric vehicles that are exciting people. Other trends such as autonomous driving are catching the eye of Amazon and Google to develop solutions in this sector. However, unlike with the type of drive, the changes are less evident and less disruptive here.

Asset 4

SWOT analysis: strengths, weaknesses, opportunities, and threats analyzed

Let’s explore the strengths, weaknesses, opportunities, and threats of Tesla’s current business model.

Strengths

Let’s start with the strengths. What sets Tesla apart at the moment?

  • Moat through vertical integration
    Apple is not only a smartphone manufacturer but also a software developer. In the case of cellphones, it now makes its own processors rather than purchasing them.

    Amazon began as an online store and has now converted practically every expense item into an income source: AWS has its own cloud infrastructure, Amazon Pay is its payment system, and it has developed its own logistics route, among other things.This is done for various reasons, including reducing uncertainty and reliance on third parties, speeding up construction, lowering costs, and improving quality control. Vertical integration, for example, has given Tesla far more control over its production process, as well as a faster response to changes that are required, all at a lower cost by eliminating the middleman.

    Tesla now manufactures its own batteries, electronics, parts, and even car seats. As a result, they can create highly specialized and superior components. Tesla plans to start producing battery cells itself. Currently, it sources them from Panasonic, LG Chem, and CATL and assembles them into battery packs at its gigafactories in Nevada, Shanghai, and soon, in Berlin. It aims for cell production of 100GWh per year by 2022 and 3TWh per year by 2030, although it will still source cells from suppliers.

    Tesla is therefore also vertically integrated and, like Apple and Amazon, can experience the same opportunities, such as better control over the supply chain, higher margins, and a stronger moat.

  • Technical advantage
    Tesla is a pioneer in the field of electric vehicles. As a result, it now has a technical advantage: its automobile range, usability, autonomous driving technology, and charging infrastructure are all ahead of the competition, in some cases by a long shot.
    There are two questions we can ask:
    • How big is the projection?
    • Does it get bigger or smaller?

    Arguably, we can say that competition is starting to catch up, but partly owing to how weak it’s been recently. German automobile manufacturers are now also producing for the mass market and suited for the everyday person.
    Tesla has a substantial advantage in autonomous driving since it collects the most data and can develop intelligent AI to drive the car safely.
    This lead is not as large as it appears, as Google and Amazon are strong competitors. Volkswagen is potentially scaling and might equip 10 million cars a year – a lot more than Tesla – with sensors and learn.

    One thing is for sure, Tesla is ahead technologically, even if the magnitude of the lead is debatable.

  • Elon Musk
    Elon Musk is a visionary and considered one of the best entrepreneurs globally, having founded several successful companies such as SpaceX, Tesla, and The Boring Company. Musk alone is a tremendous marketing tool for Tesla, as few other CEOs have such clout. On Twitter alone, he has 59.1 million followers. But it also oscillates between genius and craziness at times!
  • Traditional manufacturers are EV laggards
    One of Tesla’s advantages is that traditional manufacturers have flaws. Despite their high revenues and research spending, US and German car manufacturers like Daimler (which were even involved in Tesla up to five years ago), Volkswagen, or Ford have not been able to compete with Tesla in the field of electromobility. Tesla’s competitors have recently unveiled complete e-mobility initiatives, as they face increasing pressure to battle climate change and reduce emissions per domestic regulations. Volkswagen, for example, has stated that by 2035, it will no longer make cars with internal combustion engines in Europe.
  • Free Marketing
    You can bet that when Apple unveils the new iPhone, the entire globe will be watching and reporting on it. Tesla has accomplished the same feat: the whole world is waiting for new models.
    The pick-up got introduced, and its eye-catching design immediately caught attention. Furthermore, the video became viral, in which the pane’s strength is shown by a throw, at which point the pane breaks.
    Musk’s irreverent demeanor and statements, laced with engineering jargon, have given him celebrity status, which he exploits to draw attention to the Tesla brand while avoiding advertising.

Weaknesses

With strength comes weaknesses. Let’s take a look at some of Tesla’s weaknesses:

  • Elon Musk
    Elon Musk is Tesla’s strength and weakness at the same time. He is powerful entrepreneurially, but at the same time, Tesla is also – at least according to public perception – heavily dependent on him.
    Aside from this dependency, there are a few points that keep shareholders and the stock exchange supervisory board nervous:

    • Elon Musk smoked a joint with Joe Rogan on a podcast in 2018, causing the share price to crash 9%.
    • Elon Musk announced on Twitter that he was considering taking Tesla off the stock exchange at a share price of $420 (“Am considering taking Tesla private at $420. Funding secured.”). As a result, the share price rose, and Elon Musk and Tesla had to pay millions in fines.
    • Controversies that surrounded statements about the COVID-19 pandemic and the forced opening of the Tesla plants. Musk pushed back hard against the county’s forced shutdown, saying that Tesla should be allowed to keep producing cars despite the stay-at-home orders. In late April 2020, he raged against government demands, throwing expletives and labeling them “fascist” during an earnings call. By May 11, 2020, he announced that Tesla would reopen, garnering praise from anti-shutdown activists and President Donald Trump.
    • His involvement in cryptocurrency turbulences. For example, Elon Musk announced that customers could purchase a Tesla with bitcoin but renounced that shortly afterward. He also bought $1.5 billion in Bitcoin in one of the most adventurous currency deals ever undertaken by a company. As the bitcoin dropped significantly in value, Tesla had to write off $23 million in bitcoin.
  • Cyclical and cost-intensive business
    The automotive industry relies heavily on the state of the economy. Previous crises have demonstrated this, with purchasing a new car being one of the first problems to be canceled or postponed. It is also relatively expensive compared to digital business models and only scales slowly because physical production is required.
  • High turnover in management
    Even though the company and the stock price are performing well, executives who report directly to Elon Musk have considerably higher termination rates than Amazon, Alphabet (Google), or Apple. High pressure, management style, and discontent with external communication are all thought to be factors. Whatever the issues are, it’s usually not a good thing, as every time knowledge gets lost, it causes unrest.
  • Bad reputation within the industry
    An interesting observation is that Tesla only scores 8th in comparing automobile manufacturers on Fortune’s list of the most admired companies of 2020, created by industry experts and executives within the industries. Toyota came in first, followed by BMW in second. Tesla outperforms the competition and takes first place in the category of “innovation,” but performs poorly in terms of “Use of Corporate Assets,” “Financial Soundness,” and, most notably, “Global Competitiveness” (global competitiveness). As a result, there is a disconnect between outsiders’ perceptions and industry insiders’ perceptions. We don’t know why this is: industry insiders may be able to appraise the issue more realistically, but they may be negatively affected by Tesla and have a negative impact on their opinion.

Opportunities

What potential is there for the company to grow and raise its value?

  • Market leader in electromobility and further market penetration
    Tesla is the market leader in the electromobility growth area, which is currently developing rapidly, and they are benefiting from it. Everything now implies that state subsidies and technological advancements will sustain these advancements. However, as the market grows, the share of Tesla will eventually go down. In the US, Tesla’s market share in sold cars in 2021 (up to May) is still more than 50%, but in Europe, it is only 25%, and VW is coming up strongly.
  • New products in the high price segment
    Tesla unveiled a new SUV that contradicts previous car concepts, is also developing a premium roadster, and introducing the Tesla truck with an electric motor. All of these are additional strong models launching in 2022 and potential sales drivers.
  • Rising profit margins
    Wright’s Law is a theory that describes the relationship between increasing production volume and decreasing production costs. Profit margins should increase with larger quantities. Tesla’s gross margin is now comparable to other automakers, which is a positive indicator despite smaller volumes.
    Tesla can reduce costs even more, according to Ark-Invest:
    Picture7
    Source: ARK Investment Management (2021)
    We can also anticipate that significant cost reductions are still possible, resulting in higher profits. However, this is not always the case. If all car manufacturers’ costs decline, prices will fall as well. The gross margin primarily gets determined by Tesla’s ability to:

    • reduce production costs, and
    • maintain pricing stability.
  • Autonomous driving to bring new possibilities
    What is realistically feasible when Teslas can drive autonomously, potentially without a driver? This is a future vision that optimistic observers and Elon Musk have previously articulated.
    If Tesla succeeds in establishing itself in this market, entirely new value chains may emerge: Tesla could offer self-driving taxis, private cars can get transformed into taxis, etc. According to Ark-Invest, if it happens, Tesla’s stock would rise well past the trillion-dollar valuation. This is something we can all look forward to in the future.
  • Complementarity of EV and energy business
    Most people only consider Tesla as an automobile manufacturer despite 7% of the solar and electricity storage business revenues. The company drives innovation with its solar roof product and battery product that, when combined, enable car customers to charge their Tesla’s and other EVs with their own clean and CO2-free electricity. Despite some problems with customizing solar roof installation in 2020, demand is high, and the past growth in this business segment in 2021 illustrates the future potential of this second product segment.

Threats

Every business faces threats such as a faltering economy, poor operational decisions, governmental interference, etc. Let’s look at what can jeopardize or stifle the business strategy shown here.

  • Dependence on the trend in electromobility
    Tesla will continue to flourish because of the demand for electromobility. While this is a strength, it can also be a risk to the company. For example, if infrastructure expansion – technically, financially, or regulatory – does not keep pace with government pushes for electric vehicles. Germany is currently demonstrating how fast critical public infrastructure may become a hurdle to new technological solutions.
    They desperately need high-voltage transmission lines to transfer renewable energy from north to south, but they are a year behind schedule. This can be a limiting factor that electromobility can make up in the market.Hydrogen is a significant alternative, and it gets traded repeatedly, but the big names in the auto industry have conflicting ideas. Toyota, for instance, is betting heavily on hydrogen while Volkswagen, the German manufacturers, hasn’t made it a priority. Near the end of 2019, Herbert Diess, Chairman of the board at Volkswagen, said that hydrogen vehicles are nonsense. While there are opposing thoughts on hydrogen cars, countries are spending big money on them. Germany, for instance, is planning on spending 9 billion euros of publically funded money in this area.
  • Resource dependency
    Controversy follows Tesla, such as the possibility of lithium and cobalt shortages, which are essential raw materials for batteries. The German economic daily Handelsblatt recently discussed possible resource shortages in electric cars.
    Several things have occurred, for instance, cobalt-free batteries are in the works, and new resources are being created. Some investors even dispute the very concept of electric mobility. Still, the world’s largest corporations and the countless investors who invest in them are too naive to notice.
    There is, however, a risk of dependency. Combustion engines are also at risk, as oil is a resource that has previously experienced delivery delays, environmental degradation, and price changes. However, the danger associated with battery raw materials is first-time development, which can stifle the advancement of electric transportation.
    The contribution of Handelsblatt also concludes: There are enough resources worldwide, but accessing them quickly enough is a great challenge. According to the Center Automotive Research (CAR) analysis, battery cells for 15 million new vehicles will be missing worldwide in the next six years due to a short-term lithium shortage.

    • Competition from other automobile manufacturers
      Tesla faces competition from two different areas:

      • automobile makers
      • other emerging companies

      Those that are established have realized that they must act quickly. The Porsche Taycan, a luxury vehicle, is now available for purchase. Volkswagen’s ID.3 and ID.4 electric vehicles are now available, as are Audi and Mercedes’ first electric vehicles. Other investors are also including Volvo, Kia, Nissan, etc.

      Tesla recognizes the competition and announced that its superchargers would be open to vehicles from other manufacturers later in 2021. Tesla also hopes its charging networks will be available to other electric vehicles worldwide in the future.

      In 2019, carmakers introduced a remarkable number of 105 new Battery electric vehicles (BEVs) and new 38 plug-in hybrid electric vehicles (PHEVs). By 2020, they plan to sell around 450 additional models, of which 293 will be BEVs. Most of them will be midsize (C segment) or large vehicles (D segment).

      Picture8

      Source: McKinsey & Company (2021)

      Wrong assumptions have been made in the past, most specifically, that automotive companies make billions in profits. It will be challenging for Tesla to compete if resources are continually invested in technological change and, if required, competencies are packaged. However, because of the financial strength of these companies, we should not abandon the concept altogether.

      Other up-and-coming brands focus on electric vehicles, such as Polestar (a Volvo subsidiary), which now offers a competitive variant for the Tesla Model 3.
      Chinese manufacturers are also strong: BJEV or BYD are becoming more known because they play an influential role in the Chinese market, which is considered the largest globally. So it does not come as a surprise that Tesla is still number one in terms of world market share (16.2% in 2019), but that the competition, particularly from China and Germany, will be fierce.

      Picture9

      Source: McKinsey & Company (2021)

      Tesla’s competition doesn’t need to be defeated as the market will continue to develop at a rapid pace. However, as competition grows, it becomes more difficult for Tesla to gain market share and attain higher prices and bigger profit margins that justify its current valuation.

    • Competition from tech giants in autonomous driving

      Tesla doesn’t just have competition in electric vehicle manufacturing, but big names are heavily involved in software. For example, Alphabet, the parent company of Google, uses Waymo to work on autonomous driving. In addition, Amazon is investing USD 2.5 billion with Rivian, the electric car manufacturing company, and purchased Zoox from this segment.Tesla does have a different revenue model because they manufacture electric vehicles and equips them with the software they created. On the other hand, Amazon and Google are more concerned with selling software to EV manufacturers.
      Tesla has an advantage of creating autonomous driving technology as there’s an increased volume of user data. However:

      1. Major automobile manufacturers, such as Volkswagen and Toyota, can equip many automobiles with appropriate sensors if they follow suit on a large scale. A collaboration to take note of is between Volkswagen and Microsoft. VW’s new software division will collaborate with Microsoft to develop a cloud-based platform that will streamline development and enable faster integration into the company’s vehicle fleet.
      2. If Google or Amazon make their technologies available to other manufacturers, the amount of data collected might be much more than Tesla. Another advantage is once a software-based technology is established, it is no more expensive than a less-developed one. As a consequence, you get a better product at a lower price.However, let’s not overestimate the impact, as public acceptance of completely autonomous vehicles will be minimal in the short and medium term. As a result, it’s unclear whether a slightly improved autopilot will decide the buying decision.

Conclusion: buy Tesla shares? Pro Contra

Now that we have a thorough picture of the business, we can look at the stock, combine quality and valuation, and come to a conclusion.

Which scenario justifies the current assessment?

Tesla’s rating appears to be ridiculously high. What would have to occur for the assessment to be justified?
Let’s discuss the statistics and make educated guesses regarding profit margins, sales, and growth rates. For the values in this table, inflation isn’t a factor.
Throughout 2020 and 2021, Tesla’s gross margin was approximately 20% on average. In the last 15 years, vehicle manufacturers’ net margins have averaged 4%. In the previous ten years, premium brands like VW and Daimler have never had a share price increase of more than 6%, even during the company’s greatest years. We can effectively anticipate 6% if we assume Tesla’s profit structure would be comparable in the long run, albeit I see minor upside potential here, so let’s assume 6.5%.

The two largest automakers, Toyota and Volkswagen, are already generating record sales of almost $280 billion apiece. Let’s assume that Tesla sells around the same number of cars as it does now, a ten-fold increase. If Tesla can grow sales at a rate of 35% or more per year for the next five years, and then 20% per year for the next five years, this goal will be met, if not significantly exceeded, in ten years.

It is currently valued at $ 710 billion. The valuation should be higher after ten years since we expect a return on our investment. The value will be $1,532 billion in ten years, assuming an annual return of 8%.

So, if Tesla made $290 billion in sales over ten years and had a net margin of 6.5%, the company would earn $18.85 billion in profit. This corresponds to a price-earnings ratio of 81 in relation to the required valuation of $1,532 billion. For example, Volkswagen, Daimler, and Toyota were never valued at a P/E ratio of more than 15 and usually valued at 11-13.

Tesla’s valuation would be $321 billion in ten years if we merely gave it a P/E ratio of 17 (i.e., investors are willing to pay 17 times earnings for their shares). To be at the fair level, today’s share price would have to decline by about 81%, with an annual return of 8%.
In summary: Tesla’s stock is highly overvalued now, with a future profit margin of 6.5%, an increase in sales to market leader level ($710 billion), a goal valuation of 17 times profit, and a required annual return on Tesla shares of 8%. To be priced fairly, it would have to drop by about 81%.

The range of possible results: 5 scenarios

What is evident is that there are several unknowns in this circumstance, which can make or break the outcome. This is why Tesla’s stock is riskier than that of other companies.
Open questions that may have an impact on the scenario outlined above include:

  • Due to its solid vertical integration, can Tesla generate a better net margin than expected?
  • Will the automotive market continue to develop by about 50%?
  • Will Tesla grow to the same size as Toyota and Volkswagen (both selling over 10 million cars each year) – or even bigger
  • Will Tesla’s market position be so robust in 5 to 10 years that it receives an unusually high ranking for automobile brands?

The following five scenarios have been calculated using slightly different assumptions:

Table 2 01

Table 1 01

In the projected circumstance, the share price is almost the same as the one indicated above, which is 80% above the fair value. You are free to choose which scenario appears to be the most realistic to you. I’m curious to see what the comparison with reality will reveal over the following few years.

There are four essential facts from these scenarios that stand out:

  1. Tesla shares are much riskier than other stocks due to the wide range of possible outcomes.
  2. Tesla has a reason for being. Based on current data, Tesla is worthless or about to go bankrupt is substantially overblown.
  3. Anyone who answers positively for Tesla on the above questions and thus assumes one of the more positive scenarios with higher profit margins, a higher valuation, or completely new markets for Tesla, which is not entirely ridiculous, will likely find the current valuation warranted and even see a price potential.
  4. Tesla, on the other hand, is not a purchasing contender for me. For the current valuation to be justified and a good return to be achieved, things must go extremely well – taking into account the risks of the SWOT analysis and the cyclical business model. I don’t think it’s impossible, but the risk-to-reward ratio isn’t appealing enough in my perspective.

Pro

  • The most relevant vehicle manufacturers have the fastest growth rates.
  • Electromobility is the market leader, and autonomous driving technology is robust.
  • They are vertically integrated through automobiles, batteries, solar cells, and software, resulting in a moat, independence, and the potential for larger profit margins.

Contra

  • Exceptionally high and optimistic rating.
  • There are high fluctuations in value.
  • The business model is cyclical and capital-intensive.

My opinion

I find Tesla fascinating and admirable. The company has despite all scepticsm achieved tremendous breakthroughs in product innovation and paved the way for an e-mobility mass market. But the stock is one of the hardest to evaluate. I give Tesla in my personal rating a score of 58 out of 100 points. The main reason for this average rating is the valuation. When looking at the fundementals Tesla seems immensely overvalued according to my calculations. However, the revenue growth potential for Tesla over the next 10 years is not easy to estimate as Tesla is not only an EV manufacturer. For the moment I am not invested in the stock. But I will follow the developments of Tesla closely. If the stock price comes down or growth in the non-EV business accelerates I might reconsider that.

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*In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.