Why Tesla Stock Cannot Be Valued The ‘Purist’ Way
Tesla is among the most polarizing stocks of our time. Analysts have a wide range of price targets on Tesla (TSLA) that range from $0 to $4,000. Even Ashwath Damodaran popularly known as the “dean of valuation” valued Tesla at $190 per share in 2019. This year, he raised his forecast to $427 per share under an optimistic scenario. Tesla stock is over two times what Damodaran valued it earlier this year.
Going by the “purist” approach, Tesla stock appears grossly overvalued as it trades 58x its expected 2022 earnings. It’s not even worth comparing it to established automakers whose PE ratios are in low single digits based on 2022 multiples. The valuation multiples are way higher than the established tech companies as well.
But then, valuing Tesla is a conundrum in itself. Some see it as a technology company while for others it is an automotive company that has posted a net profit in only seven quarters since inception. The reality lies somewhere in between. Tesla is an automotive company with a strong competitive advantage in software and battery capability. Going by the purist approach, one may never have bought Tesla stock and missed on the strong gains. Incidentally, Tesla has generally traded above its consensus price target reflecting how the market thinks differently from the analyst valuation models.
If the future is going to be all-electric, as the consensus is, Tesla has a competitive lead over its competitors. It is an iconic brand that is synonymous with electric vehicles. The company is setting the stage for explosive future growth with its new factories. The China Gigafactory is ramping up operations while the next two Gigafactories are coming up in Berlin and Texas. Despite all their efforts, established automakers have not been able to come up with products that match Tesla cars at the price points.
This year, Tesla expected to sell half a million cars. While the guidance might now look elevated after the pandemic, the company has managed to get in the league of established automakers with its growing shipments. Over the next couple of years, Tesla would look like a full-fledged automaker with plants across the globe.
Meanwhile, Tesla is not only about electric vehicles. In its Q3 2019 earnings call, CEO Elon Musk said that the energy business would be as large as the automotive business. The energy business currently accounts for only about 6% of Tesla’s revenues that stood at $24 billion in 2019.
Apart from the energy business, it has an optionality to commercialize its Autopilot and battery technology. Waymo, Google’s self-driving venture has an estimated valuation of $30 billion. Tesla’s market capitalization is roughly $160 billion.
Tesla’s full self-driving subscription is expected later this year. Elon Musk expects Robotaxi and Network App might be coming in some markets next year. All these ventures would add value and are not currently accounted for going by the purist approach.
Does that mean that Tesla stock does not currently look overvalued? It probably is with the market capitalization near $150 billion. Even Elon Musk tweeted calling the stock overvalued! However, growth has never been cheap. Especially under current times, growth has been even scarce.
Tesla stock is for optimists. You have to believe in a green future and Elon Musk’s abilities before buying Tesla stock. Also, be prepared for sharp pullbacks in the short-term. You should buy Tesla stock only if you fit into the traits mentioned above.
Certainly Tesla is not a traditional company at all, except for the profit motive. And so it will not quite fit the standard model very well. That should be obvious. How that relates to the future is a bit less clear, since not every prediction is based on reality. Computer driven cars are not inevitable, no matter what the various pronouncements are. The requirements for safe and smart driving require both perception and insight that are far from currently possible, and the cost of the required infrastructure additions are totally daunting, but seldom mentioned.