Summary
Tesla is rated a sell because its valuation is similar to a software company that is rapidly growing however it makes all of its earnings from selling cars. The valuation is too expensive for an automaker that isn’t growing as fast as its valuation needs. Tesla is a great company and we would like them at a lower valuation.
Understanding Tesla as a Business
The first step to understanding if Tesla is a good investment is to understand Tesla as a business. Tesla is an automotive manufacturer that produces electric vehicles. Tesla’s car models include Model S, Model 3, Model X, Model Y, and, in the future, the Cybertruck. Tesla’s cars use batteries that are charged with electricity to power their cars instead of gas. This is by far the largest source of revenue for Tesla as a company.
The second segment of the Tesla business model is energy production and storage. Tesla produces solar panels, solar roofs, and battery packs. These products account for approximately 6% of the company’s revenue.
The third segment of revenue listed in Tesla’s balance sheet is other services. This would include FSD software, vehicle maintenance, regulatory credits, and charging networks. These things only account for approximately 8% of Tesla revenue.
The moat that Tesla has is that they have the best battery technology out of all the car companies. They are the first electric vehicle maker and are ahead of all the other automakers in terms of EV technology. Their batteries hold charge for far longer than any other EV and they have a monopoly on the rapid charging stations. The other EV automakers are using Tesla charging stations and designing their chargers around being compatible with the Tesla chargers. This moat is important because regulators want the market to shift to all electric vehicles by 2030.
Another moat that Tesla has is the full self-driving software. Tesla is the closest in the race to develop cars that can drive themself. They are already good enough to generate revenue from this software. Tesla also collects way more driving data and has way more data than any of the other automakers. This advantage in data matters when it comes to developing a functioning self-driving software.
Valuation Metrics
Using the finviz screener we can see all the relevant valuation metrics for us to understand.
Tesla is valued at $831 Billion by market cap. The current P/E is 70 which means that you are paying $70 for every $1 that Tesla earns. The earnings has grown by 40% yoy for the past 5 years. The sales increased the past 5 years by 47% yoy. An especially important metric to note is that earnings is only anticipated to grow by 11% for the next 5 years. That is not a good sign for Tesla trading at such a high valuation.
FAST Graphs Analysis
Using the FAST Graphs software we can see how Tesla’s earnings compare to their valuation. The black line represents the share price and the orange line filled with green is the earnings per share multiplied by the earnings growth rate. The light green is the projected earnings by analysts. Using FAST Graphs Tesla looks like it is over value compared to its earnings. There was a brief moment when Tesla touched the FAST Graphs fair value but then immediately shot up.
Bull Thesis
Tesla has had an incredible growth rate in sales and earnings for the past years. This growth rate will continue as Tesla continues to be the innovative leader in the automotive space. The current valuation of Tesla is warranted because of the growth opportunities that are in front of them.
First the market share of total electric vehicles sold will continue to grow exponentially and Tesla will have the majority of that market share. The most realistic estimates have the total ev market increasing by 17% CAGR from now until 2030 and Tesla will have the largest market share. The most extreme estimates think that the car market will be majority EV by 2030 and Tesla will be the largest automaker by sales. This EV market shift will be because of the initiative to move to green energy to fight climate change.
The second opportunity of growth is that with the continuing green initiative the battery pack and solar aspects of the company will grow exponentially to support electricity grid stability. Solar will continue to grow as more households integrate their roofs to include solar panels. This area has exponential growth potential because the electrical grid will need battery packs to make green energy such as wind and solar feasible. Solar will increase exponentially since the current market share of homeowners that have solar installed is minimal. This aspect of Tesla’s business and growth opportunity needs to be priced into its valuation and is a part of Tesla’s large earnings multiple.
One of the largest possible revenue sources of Tesla is their full self driving software. Self driving cars will be ubiquitous in the near future and Tesla will be the leader in that. Currently Tesla is the leader in the self driving space and with the advancements of AI, Tesla’s FSD will only get better. This is an enormous potential revenue stream and it is accurate to value Tesla as a soft ware company not an auto manufacturer.
Tesla is at a fair valuation based on its prospects to continue to grow.
Bear Thesis
Tesla is currently valued like a high growth software company. They are trading at a 70 P/E which means that they need to be growing at around 70% per year. They currently are not growing at that rate in any metric. The current valuation makes them the largest auto manufacturer by market cap. This is hard to justify based on automobile sales. Toyota sells many more cars worldwide than Tesla yet Tesla is valued more highly.
The demand for EV has been overestimated and we are seeing evidence of that. Tesla is currently lowering the price of multiple of its models. When prices are cut that means there isn’t demand at the higher prices. The moat that Tesla has in terms of electric vehicles will diminish as the large auto makers develop their own EVs. The lower than estimated demand combined with the increased competition in the market will lead to worse performance as a company.
Tesla’s current valuation taking into account their other revenue streams is unwarranted and unproven. Tesla makes a vast vast majority of its revenue from selling cars. The solar and battery products have been around and aren’t seeing the demand for them to drive exponential growth. They would need to grow a large amount to be a relevant source of income for Tesla as a business. The FSD driving software is still in beta and isn’t bringing in much revenue at all. There are regulatory concerns as well as competition concerns with FSD. Will the government allow self driving cars in mass especially in the trucking industry. The other car companies are also developing FSD software and Tesla’s advantage may disappear.
Tesla’s valuation is too expensive based on competitors entering the EV space,and slowing demand for EVs.The other revenue prospects haven’t manifested in their earnings yet. Tesla deserves to be valued as an auto manufacturer not a software company.
Sell Rating
Here at Basil Leaf Capital we have to give Tesla a sell rating. We like Tesla as a company and think Elon musk is an amazing entrepreneur. We cannot get behind the current valuation of Tesla given that they are an auto company cutting prices based on demand. The competition will be fierce for their EV market share. We are also not believers in the EV future. Retail customers we talk to do not want EVs and know EVs aren’t as green as they are advertised.
For us to get our at least 15% or greater return on our investment yoy with Tesla, in 5 years Tesla needs to be value at $1.6 Trillion. This valuation would be far too great for an automaker compared to other autos selling way more cars than them.
We think that FSD is too far out with too many uncertainties about performance to be investing in that revenue stream from Tesla.
If Tesla’s valuation were to fall while maintaining the company’s successful manufacturing performance we could change our rating. This sell rating is based on current valuation.