Tesla (TSLA) – Yea or Nay

Tesla, Inc. (formerly Tesla Motors, Inc.) is an American electric vehicle and clean energy company based in Palo Alto, California.[8] Tesla’s current products include electric cars (the Model S,[9] Model 3,[10] Model X,[11] and Model Y[12]), battery energy storage from home to grid scale (the Powerwall,[13] Powerpack,[14] and Megapack[15]), solar products (solar panels[16] and solar roof tiles[17]) and related products[18] and services.

Wikipedia

I’m sure most of you have heard about Tesla before but if not, above is a snippet from Wikipedia on what the company does. This is the second article in the “Yea or Nay” series so if you’re enjoying reading these, feel free to comment below with feedback and how we can improve. Now let’s dive in.

So I know a lot of you just want the numbers first just as I do so above is a valuation summary on where Tesla’s stock price should be. As you notice, it’s all over the place and the comparable companies skews the prices toward the low end (52 week high and low has been charted for reference). However, let’s look at the companies we used to compare Tesla with.

As you can tell, most of them are traditional car and truck companies because there simply are no comparable companies to Tesla in terms of what they do and the technology they possess. The only two companies that may pose a threat are two Chinese startups, NIO and Xpeng but they aren’t even making positive gross profits yet meaning that they lose money on every car sold unlike Tesla. Thus, we had to turn toward intrinsic valuation by looking at the company’s cash flow every year and projecting them out. Using this method, we believe that Tesla is intrinsically worth between $1,138 and $1,266 per share and at the company’s current stock price that Tesla is massively undervalued. Even with a bearish case, the top end of the range ($510) is still higher than the high 52 week price. Now before you scoff and claim that this is ridiculous, let’s first go over the assumptions that we used to derive this price.

  • Tesla maintains its 3-5 year edge over other auto manufacturers in battery technology
    • In its recent Battery Day event, the company announced that it was planning to manufacture its own tab-less batteries which boast greater range and power
    • Musk has stated that Tesla plans to eliminate Cobalt from its cathodes which should make its cars more affordable
  • Tesla is able to optimize its manufacturing process and produce cheaper cars for the mass public
  • Demand for clean electric vehicles continues to increase in the future

The key feature here is not just Tesla’s battery technology but also its willingness to become more efficient in operations where other auto manufacturers are only focused on cutting costs which stifles innovation. In order for Tesla to continue growing, it must walk on a fine line between the two.

However, there are some key risks to consider as not every investment is risk-free.

  • Key man risk: Elon Musk’s departure from the company due to incapacitation or other reasons may significantly hamper the company if management that takes over focuses too much on cutting costs instead of innovation and growth
  • Subject to regulatory winds: should governments stop incentivizing clean energy, Tesla may have to increase prices on its vehicles although I believe this is unlikely as global warming is a controversial but important topic
    • Mitigated by Tesla’s push to produce a $25,000 car
  • Quality control and aftermarket parts: while Tesla in the past has met its quotas, it still has been unable to resolve its quality control and supply chain issues for aftermarket parts. As EVs become more popular, this may cause customers to purchase/lease vehicles from rivals for a better customer experience and take a hit in efficiency and innovation

Despite these risks, I still believe that opportunities for growth still outweigh the costs. Thus, we’re issuing a Yea rating for Tesla. As always, please do your own research as this article is my opinion.

Disclaimer: the author does not hold a position in Tesla (TSLA) either longing or shorting.

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