By Goran Damchevski
This article was first published on Simply Wall St News
You might wonder if the recent events can make buying Tesla, Inc. ( NASDAQ:TSLA ) stock a more approachable proposition. The stock has been down some 30% from its November highs, and currently trades at a very volatile US$ 934.8b Market Cap. There have also been news of recall, inflation and the latest earnings report, so we will put this all together, and see how the company fares.
Let's first address the vehicle recall news.
Investors might have seen a few headlines such as " Tesla recalls 580,000 electric cars over ‘boombox’ safety issue ", and it might come off that the company needs to call back more than half of this year's produced vehicles ( Tesla produced 930k vehicles in 2021 ). But after scratching the surface, one realizes that these are minor defects that can be fixed as over the air updates and the EV will be operational again. Additionally, Tesla has some idle production capacities, primarily because of the semiconductor shortage ( Q4 Report, p. 9 ), and can easily use them, should there be a need for a large scale fix.
Unfortunately, these headlines may have an impact on busy markets, and they can sometimes influence traders.
View our latest analysis for Tesla
Next, we will discuss earnings along with the fundamentals.
Fundamentals
Tesla released their full year earnings on the 26.1.2022 with some very strong numbers:
- Revenues of US$54b arriving 2.1% ahead of forecasts, a growth of 65% from last year
- Net income was US$ 5.519b compared to US$ 721m a year ago
- Statutory earnings per share (EPS) were US$4.90, 4.0% ahead of estimates
The company summarized ( in their latest report ) that it is ramping up construction of the new factories at Austin, Berlin, as well as maximizing output in Fremont & Shanghai. The development of their full self-driving software, remains a top priority.
While the summary is good, we should also consider that the semiconductor crisis may ease but persist along 2022, and developing their AI may not be a question of time, but rather of innovation and sometimes luck. So, while the company is "on track", the execution of these plans will be important.
They also provided some future guidance , stating that:
- They expect to achieve an average annual growth in vehicle deliveries of 50% for the next few years
- Reiterated that the Berlin and Texas capacities are in an Equipment testing Phase
- They are continuing development of the Tesla Semi, Cybertruck, Roadster and future products
Speculation: While their self-driving technology is great for cars, they may find a strong use case for freight trucks and vehicles, so we may hear more about the development of the Tesla Semi , which has the potential to lower costs for transportation companies and hopefully make highways safer.
The guidance is ambitious but quite doable, as Tesla is not short for funds.
Their cash balance grew to US$17.7b this year, and the company has a reasonably low cost of equity at 8.4% and a 2.6% cost of debt. While the company can borrow cheaply, they do seem to be at their optimal debt ratio, which seeks to minimize taxes in order to make room for capital investments. The high market cap can allow them to raise cash from investors, but this does come at the mentioned cost, and is not "free money" - Tesla will need to create additional value with the funds.
Note, that while inflation may cause debt refinancing to be more expensive , the company has enough capacity to cover these expenses ( interest coverage ratio of 21.6x ) or simply pay down the debt.
In order to gain a good perspective of how analysts see the company's future, we gathered the past performance and merged it with expectations in the chart below.
After the latest results, the 34 analysts covering Tesla are now predicting revenues of US$81.4b in 2022. If met, this would reflect a sizeable 51% improvement in sales compared to the last 12 months, which is in-line with the expected capacity growth.
Statutory earnings per share are predicted to bounce 63% to US$8.69.
Price Target & Value
While it may seem high, the average price target from analysts is largely unchanged at US$958 .
Looking at the spread, we can see that the most bullish analyst prices Tesla at US$1,580 per share, while the most bearish prices it at US$250.So we may not want to be assigning too much credibility to analyst price targets in this case.
Another way to estimate the value of Tesla, is to evaluate what are the future cash flows of the company worth to investors today - this is the basis for an intrinsic valuation, and if done right, is considered to yield the "rational" value of a company. This can give investors a basis on which to follow a stock, but the price rarely stays close to the intrinsic value. Nonetheless, at Simply Wall St, we have a general model that attempts to do just that.
For Tesla, our intrinsic value model estimates a value of the company at US$ 473b, or $457 per share. This puts the current stock price about 96% above intrinsic value.
The link above will take you to our valuation model for Tesla.
Investors use different approaches when deciding if a stock is worth buying, however it is much more reliable when price targets and valuation models are closer to each other.
Industry
These estimates are interesting, but it can be useful to paint some more broad strokes when seeing how forecasts compare, both to the Tesla's past performance and to peers in the same industry .
The analysts are definitely expecting Tesla's growth to accelerate, with the forecast 51% annualized growth to the end of 2022 ranking favorably alongside historical growth of 33% per annum over the past five years.
By contrast, our data suggests that other companies (with analyst coverage) in a similar industry are forecast to grow their revenue at 23% per year . Factoring in the forecast acceleration in revenue, it's pretty clear that Tesla is expected to grow much faster than its industry.
Investors should remember that high growth rates can be attributable to the quality of a company, but arguably much more of the growth comes from where a company is in its lifecycle - While it has been around for some time, Tesla is still a young-growth company, which is developing capacity, technologies, market-share, etc. These growth rates will decline as time passes, making valuation and pricing models more stable.
Moving Forward
Tesla had record performance in 2021, and management is intent that the company will have high growth for the next few years. The company is expanding on all fronts: capacity, technology, vehicle portfolio - Which may lead to interesting value unlocking opportunities in the future.
The pricing and value models have a wide range, making the stock price volatile and sensitive to external pressures, such as supply/demand, technology developments, interest rate change, supply shortages, etc.
While Tesla seems to be overvalued at the moment, it may soon become attractive again to cautious investors, so it is worthwhile to keep an eye on the stock.
Many investors argue that the stock is in a "bubble", and while that may well be true, bubbles can be seen as more of a feature, than a bug in the system - They indicate the direction of innovation and growth avenues in markets, subsequently prompting investors to pour large amounts of capital in an industry. Much of this capital may be burned, but some may foster unexpected innovations.
That said, it's still necessary to consider the ever-present spectrum of investment risk. We've identified 3 warning signs with Tesla , and understanding these should be part of your investment process.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
