Tesla Inc., (NASDAQ:TSLA) is getting stronger, and it may be time to reassess
You may be wondering if recent events can make buying Tesla, Inc. (NASDAQ: TSLA) offers a more accessible proposition. The stock is down about 30% from its November highs and currently trades at a highly volatile market cap of US$934.8 billion. There was also recall, inflation and latest earnings report news, so let’s put it all together and see how the company fares.
Let’s first discuss the news of vehicle recalls.
Investors may have seen a few headlines like “Tesla recalls 580,000 electric cars over ‘boombox’ safety issue,” and the company may have to recall more than half of the vehicles produced this year (Tesla produced 930,000 vehicles in 2021). But after scratching the surface, one realizes that these are minor faults that can be repaired and the EV will be returned to the owner. In addition, Tesla has excess production capacity, mainly due to the shortage of semiconductors, and can easily use it if a large-scale solution is needed.
Unfortunately, these headlines can impact busy markets, and they can sometimes sway traders.
See our latest analysis for Tesla
Next, we will discuss profits as well as fundamentals.
Tesla published its annual results on 26.1.2022 with very strong figures:
- Revenue of US$54 billion ahead of forecast by 2.1%, a growth of 65% over last year
- Net profit was US$5.519 million compared to US$721 million a year ago
- Statutory earnings per share (EPS) was $4.90, 4.0% ahead of estimates
The company summarizes (in their latest report) that it accelerates the construction of new factories in Austin, Berlin, as well as the maximization of production in Fremont and Shanghai. The development of their fully autonomous driving software remains a top priority.
Although the summary is good, we must also consider that the semiconductor crisis may subside but persist throughout 2022, and the development of their AI may not be a matter of time, but rather innovation and sometimes luck. So, as long as the business is “on track,” executing those plans will be important.
They also provided future directions, stating that:
- They expect to reach an annual average 50% growth in vehicle deliveries for the next few years
- Recalled that the capacities of Berlin and Texas are in the phase of testing equipment
- They continue the development of the Tesla Semi, Cybertruck, Roadster and future products
Speculation: While their self-driving tech is great for cars, they may find a strong use case for cargo trucks and vehicles, so we might hear more about the development of the Tesla Semi, which has the potential reduce costs for transport companies and hope to make the highways safer.
The directions are ambitious but entirely achievable, as Tesla is not short of funds.
Their cash balance has grown to $17.7 billion this year, and the company has a reasonably low cost of equity at 8.4% and a cost of debt of 2.6%. Although the company can borrow cheaply, it seems to have reached its optimal debt ratio, which aims to minimize taxes in order to make room for capital investments. The high market capitalization may allow them to raise funds from investors, but this has the mentioned cost and is not “free money” – Tesla will have to create additional value with the funds.
Note that while inflation may make refinancing debt more expensive, the company has sufficient capacity to cover these expenses (interest coverage ratio of 21.6x) or simply pay off the debt.
In order to get a good idea of how analysts see the future of the company, we have gathered past performance and merged it with expectations in the chart below.
After the latest results, the 34 analysts covering Tesla now forecast revenue of US$81.4 billion in 2022. If achieved, it would reflect a massive 51% improvement in sales over the past 12 months, which meets expected capacity. growth.
Statutory earnings per share are expected to rebound 63% to US$8.69.
Target price and value
Although it may seem high, the average price target analysts is largely unchanged at $958.
Looking at the spread, we can see that the more bullish analyst values Tesla at US$1,580 per share, while the more bearish one values it at US$250. So perhaps we don’t want to give analysts’ price targets too much credence in this case.
Another way to estimate Tesla’s value is to assess what the company’s future cash flows are worth to investors today – this is the basis of an intrinsic valuation, and if done well, it is considered to give the “rational” value of a company. This can give investors a basis on which to follow a stock, but the price rarely stays close to intrinsic value. Nevertheless, at Simply Wall St we have a general model that attempts to do just that.
For Tesla, our intrinsic value model estimates a company value of $473 billion, or $457 per share. This puts the current stock price about 96% above its intrinsic value.
The link above will take you to our evaluation model for Tesla.
Investors use different approaches to decide if a stock is worth buying, but it’s much more reliable when price targets and valuation patterns are closer together.
These estimates are interesting, but it may be useful to draw broader lines when seeing how the predictions compare, both to Tesla’s past performance and to its peers in the same industry.
Analysts certainly expect Tesla’s growth to accelerate, with projected annualized growth of 51% through the end of 2022 ranking favorably alongside historic growth of 33% per year over the past five years.
On the other hand, our data suggest that other companies (with analyst coverage) in a similar industry are plan to increase their turnover by 23% per year. Taking into account the expected revenue acceleration, it’s pretty clear that Tesla should grow much faster than its industry.
Investors should remember that high growth rates can be attributed to the quality of a company, but it can be said that a lot of growth comes from where a company is in its life cycle – Although it’s been around for a while, Tesla is still a young growth company building capacity, technology, market share, and more. These growth rates will decrease over time, making valuation and pricing models more stable.
Tesla posted record performance in 2021, and management wants the company to experience strong growth over the next few years. The business is growing on all fronts: capacity, technology, vehicle portfolio – which could lead to some exciting opportunities to unlock value in the future.
Price and value patterns have a wide range, which makes the stock price volatile and susceptible to external pressures, such as supply/demand, technological developments, changes in interest rates, supply shortages, etc.
While Tesla appears to be overvalued at the moment, it may soon become attractive again to cautious investors, so it’s worth keeping an eye on the stock.
Many investors claim that the stock is in a “bubble”, and while that may be true, bubbles can be seen more as a feature than a bug in the system – They point to the direction of innovation and growth pathways in the markets, subsequently inducing investors to pour large amounts of capital into an industry. Much of this capital can be burned, but some can foster unexpected innovations.
That said, there is still a need to consider the ubiquitous specter of investment risk. We have identified 3 warning signs with Tesla, and understanding them should be part of your investment process.
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.