Updated: Nov 17
Tesla (TSLA stock) has made a lot of noise lately. It definitely did! Since the beginning of the year, it has more than quadrupled - fantastic growth! It is not surprising that there are many who want to own this security. Some of the great investors wrote: "A company can be good for management, for government, for employees, for journalists, but not for shareholders." Others were giving TSLA stock a target price of $15,000 (pre-split). Let's take a closer look at whether the company is really as good as its stock quotes. Tesla can be judged from two angles - as a car manufacturer and as a technology company.
Tesla is a manufacturer of modern electric vehicles.
Tesla is a high-tech electric vehicle manufacturer. Thanks to Elon Musk, a real electric car boom began. And Tesla quite has its own market niche and can even successfully compete with traditional cars with internal combustion engines. However, Elon Musk's company is priced as much as Toyota, Volkswagen, Audi, and Ferrari combined! The company's value clearly does not correspond to its production capacity - it does not produce as many cars as the above manufacturers, and they are not as expensive as in the case of Ferrari.
However, if the company is good, then investors can buy its shares “for future profits,” that is, at higher multiples, in the expectation that the issuer will develop and in the future will justify the current purchase price. But let's see how real these estimates are.
Take Toyota for comparison as the most expensive (in terms of market capitalization) automaker after Tesla.
Let's evaluate how optimistic the expectations of investors are at the current Tesla quotes. Toyota's 2019 sales totaled 26.8 trillion yen, or approximately $ 255 billion, with a net profit of $ 24 billion.
Tesla had $ 24 billion in revenue for 2019, and had no net profit. For the six months of 2020, revenue grew by 20% compared to the first half of 2019. If we assume that Tesla's revenue continues to grow at a constant 20%, then in 13 years it will catch up with Toyota in terms of sales. A more fantastic scenario can be assumed that Tesla will double its revenue every year, then it will "catch up" with Toyota in three to four years. But the multiple growth of revenue does not just happen, it is desirable that it be supported by the corresponding production volumes. That is, are investors suggesting that Tesla will increase car production tenfold in the coming years?
However, it is not enough to increase production; it is still necessary to sell everything that was produced. And competitors will not sit back and watch how their markets are "eaten away", and will certainly find something to offer the consumer. Therefore, Tesla will have to work very hard to surpass Toyota in terms of sales. As a result, we come to the conclusion that Tesla is estimated too optimistically as an automaker.
Tesla is a tech company and should be priced accordingly
At the same time, investors usually cite the example of Apple as the most expensive, technological, and innovative company. Apple's net profit in 2019 amounted to about $ 60 billion. By the end of 2020, it will be about the same. The company is worth about $ 2 trillion, that is, it trades for about 30 annual profits. This is slightly above the market average - the average P / E for the US is 20-25. Tesla is worth 464 billion. For a P / E of 30, the net profit should be about $ 15 billion. For the six months of 2020, Tesla showed $ 120 million in net profit. Suppose that by the end of the year it will double and amount to 240 million. To reach the level of 15 billion dollars, net profit must increase 62 times. Imagine that a company succeeds in doubling it every year. In this case, it will take eight years for the company to arrive at the multiples at which Apple is trading.
By itself, doubling profits is not unrealistic: together with the rapid growth of revenue and optimization of spending, it is quite possible to achieve this. Maybe Tesla can even do this for several years. But doubling profits for eight consecutive years is like winning a super prize in the lottery. At the same time, competitors are not asleep, and technologies these days are easily and quickly copied. Of course, you can counter that your technologies need to be protected by patents. However, this is unlikely to help. There was major patent litigation between Samsung and Apple at one time. It seems Apple even won, but it didn't help much. At the end of 2019, the share of Samsung smartphones was about 22%, while the iPhone had about 14%.
If Tesla was operating in an empty market, then, of course, it would be quite possible to increase profits 62 times over eight years. But in a high-tech computerized world, such a scenario looks fantastic. As a result, we get that as a technology company Tesla is evaluated too optimistically.
It may well be that Tesla itself is not a bad company and produces decent cars. Probably, Elon Musk, on the platform of his company, will come up with and implement another innovation, which other automakers did not guess. However, as shareholders, you need to understand how you can get a return on your investment. You can buy shares at high multiples if the company has a future. That said, multiples should still be within reasonable limits, and TSLA stock is currently trading at a P / E of around 2,000.