Is It Time to Buy Shares in Tesla?

On Nov 12th 2021 I wrote a blog about Tesla outlining why I thought investors should sell and indicated that a Tesla Share price of  $140 price ($420 pre stock split) was possible. Well we now have reached that price it is time to have another look at Tesla. 

Please note that when I wrote my blog last year Tesla had not split so the share price at that time was $1200. The company issued a 3:1 stock split in August which gives you a $400 equivalent.

Tesla is not a Technology stock … 

I have been arguing for quite some time that Tesla is being valued like a Technology stock as opposed to a car manufacturer. So when evaluating whether or not you should buy shares in Tesla it is important to make sure you are making the correct comparisons. Yes, Tesla was groundbreaking when it came to electric vehicle technology developing batteries with much greater range. Also creating a look and feel like we were going ‘back to the future’ … all cool. The company also has self driving car technology. My argument has always been that Ford and VW in particular were catching up. Now BMW, Audi and Mercedes have luxury vehicles which are keeping on the high end with Tesla. 

The Tesla story is remarkable ….

The Tesla story is incredible…for a ‘start up’ to break into the capital intensive car manufacturing industry and become successful is almost a miracle. In 2017 Tesla $11.76 billion. In the most recent 4 quarters Tesla has delivered sales of $75 billion. That is a whopping 600% plus increase in sales in just 5 years. 

Future Tesla growth looks promising too….

In the next 5 years analysts currently predict that Tesla will at least double sales again. That is the equivalent of 20% plus sales growth year on year for the next 5 years. 

The company made its first profit in 2020. And profits are set to double also in the next 5 years. With average analyst estimates of $8 per share in 2026. 

A look at competitors …… 

Let’s take Ford and Volkswagen as examples. Ford are forecasted to grow revenues by 20% over the next 5 years which is just 4% per annum. Volkswagen are forecasted to grow at less than 2% year on year for the next 5 years. So the Tesla growth story relative to its competitors is set to continue but remember VW already sells €278 billion of cars versus $75 billion for Tesla. It is a lot easier for Tesla to grow at this stage of their life cycle than it is for Volkswagen or Ford. 

Valuations …… 

• Price to Earnings: The stock has a trailing PE of 48 and is trading at a forward PE of 32 times 2023 estimated earnings. 
• Price to Sales: The stock has a trailing PS ratio of 6.65. And a forward price to sales ratio of 4.13. 

Let’s have a look at Ford and Volkswagen to compare valuation multiples. 

• Forward PE: Ford is trading at about 10 times 2023 EPS estimates. Volkswagen is trading at just 5 times 2023 eps estimates. PE valuations suggest that Ford is valued at a 1/3rd of the value of Tesla and Volkswagen is valued at a 1/6th of the valuation. 
• Forward P/S: Ford’s Forward Price to Sales ratio is 0.3. This means that Ford is trading at almost 1/14th of Tesla on a price to sales basis. Volkswagen is trading at a forward PE of just 0.28. That means that Volkswagen is trading at just 1/15th of the value of Tesla. 

Tesla stock forecast:

• There are 41 analysts covering Tesla. The average target price is $259 which is 106% greater than current levels. This bodes well for shareholders if these analysts are correct. Remember, just one year ago they predicted that Tesla would trade at $272 by the end of this year. So they got that badly wrong! 

Let’s use our own valuations ….. So now we have established that the growth rate of Tesla is predicted to be 5 times greater than Ford and VW over the next 5 years. That certainly deserves a premium. So let’s give Tesla a valuation multiple that is deserving of their growth forecasts. 

• 2023 target EPS is $5.50. Applying a PE of 30 will give us a $165 target price. 10% higher than yesterday’s closing price. 
• 2023 revenue estimate is $115.67 billion. Tesla has 3.16 billion shares outstanding. That equates to sales per share of $36.25 Applying a multiple of 4 (10 times greater than their competitors) would give you a target price of $145. Roughly the same as yesterdays close. 

Sentiment:

• Tesla had a cult-like following which shouldn’t be underestimated. 
• This is now starting to wane as Elon Musk’s takeover of Twitter has produced some serious negative press. 
• We wrote last year that when sentiment shifts the stock will sell off hard. It has done this now and sentiment is quite negative on the stock. This is a good thing for bullish investors. 

Verdict:

I am now neutral on the stock. Sentiment is clearly against Tesla right now. Competition and costs continue to rise. I think the stock may go lower in the very short term. 

Based on current revenue and profit projections. My 12 to 18 month target price for Tesla is $150. Given the sentiment and risks that Tesla presents I would be a buyer of Tesla if it fell to $100. 

For now, I will continue to monitor the stock. 

Happy Investing 

Stephen