Investing in Tesla: fundamental analysis and forecasts

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Is Tesla a bubble? According to some analysts and investors, Tesla is a perfect example of the divorce between fundamentals and the market: shares + 420% YTD, but ‘true’ numbers say something else, perhaps.

investing in tesla

Tesla: if it will be one of the largest speculative bubbles in the history of Wall Street, the future will tell. Surely, its unstoppable upward trend is sowing more than one doubt: Tesla stocks have gained 425% since the beginning of the year, challenging and even beating the Covid pandemic. The buys that have allowed Tesla shares to fly by more than + 400% are even more striking when you consider that, in the same period of time – that is since the beginning of the year – the US benchmark stock index S&P 500 has risen by “just” 9% (and that’s not even a little, considering the Covid crisis).

Is investing in Tesla stocks a good idea? The doubts are not few. Rajvindra Gill, analyst at Needham & Company, believes that this year’s rally has sent the stock flying to unsustainable levels: “We have never seen such a leap in action with so little attention to the fundamentals of society“.

Tesla shares: the price has gone up, but the fundamentals?

Since the minimum tested in March, many purchase orders for Tesla stocks have come from both fan followers of Elon Musk and the surge in interest from retail investors, many of whom, closed at home for the lockdown, have decided to dedicate themselves to online trading. It must be said that Tesla has also brought a lot of luck to the fund managers.

tesla shares

Tesla’s share price rally challenges not only market expectations – consensus estimates on earnings and revenue can’t keep pace with the stock price boom – but also precedents in Wall Street history. So much so that, according to Gill, even if Tesla car sales grow at an annual rate of 21% over the next decade and the company cuts manufacturing costs, the best scenario would be a 14% drop in prices.

Judging stocks based on their price is not entirely correct, but the analyst explains that it is important to do so in order to understand what the true value of a stock is. Gill reiterates the “underperform” rating in his note, citing various reasons.

First of all, the consensus estimates have lagged significantly behind the upward trend of Tesla shares, which from the low of March has flown up to + 490%; in the same period of time, the estimates on turnover for 2021 were revised up by only 12%, while the adjusted earnings outlook was improved by 25%. Tesla’s revenue and earnings estimates for 2022 grew by 2% and 42%, respectively.

According to Gill, the stock’s rally thus “created a further decorrelation” between the group’s fundamentals and the stock’s value.

Investing in Tesla: forecasts for the coming years

With these numbers, there is considerable downside for Tesla. In the baseline scenario, Gill estimates compound rate sales growth of 21% over the next decade, and cash flow growth of 35%. By 2029, Tesla is expected to sell 4 million vehicles per year at an average price of $ 41,000, cementing its leadership as a global auto maker. Despite this, in discounting 10 years of cash flows, the baseline scenario implies a 14% decline in Tesla shares. And Tesla’s own bearish scenario, which predicts an annual sales growth rate of + 17%, is not an easy target to achieve.

Needham also contests that Tesla should be viewed more as a tech giant than an auto maker. Hi-tech stocks, the analyst recalls, are traded at very high multiples equal to 35/45 times their earnings per share. Although Tesla has reported stable sales in recent years, the point is that it has not been able to “show consistent profitability” with current valuations.

That said, news from the last few hours has continued to rekindle confidence in the giant created by Elon Musk, also recognizing the solidity of the fundamentals. On Monday, October 12, 2020, Standard & Poor’s Global Ratings upgraded Tesla’s bond rating from BB- to B+, two levels below investment grade.

Among the reasons for the Tesla bond upgrade, S&P cited better execution, increasingly efficient production, global expansion that continues to strengthen the company’s competitive position. The rating agency also referred to vehicle deliveries for the third quarter, showing appreciation for the Model Y, the compact SUV that is the latest vehicle produced by the group.

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