Tesla may always be undervalued

[BrianZ]

Lately I've been thinking about Tesla's stock appreciation potential, and I have come to some startling conclusions that Tesla's stock may very well follow Apple's footsteps - consistently undervalued.

The stock market likes internet company stocks, because of their extremely scalable nature, it has the potential for very high growth and high profit margins. Therefore, many large internet companies have extremely high P/E ratios. It is the sign of investors factoring huge growth premiums due to the high future growth and profitability into the current stock price.

Hardware companies on the other hand, is on the opposite side of the spectrum. Because of their generally limited growth rates and profit margins, many hardware companies have a low P/E ratio as a sign of investors factoring low growth premiums due to lower growth rate and profitability. The P/E ratio is supposed to drop over time as the growth is realized.

However, the market seems to be quite irrational when it comes to valuing individual companies. It seems to lump companies into categories and base the valuation on the category it is in. Therefore, one would see internet companies with low growth rate and profit margin still having a high P/E ratio while extremely high growth rate and high profit margin hardware companies at low P/E ratios. Tesla and Apple falls into the latter camp.

Take a look at Apple for the last 10 years. It pioneered the smartphone revolution. It has had huge YoY growth of 30-80% between 2008-2012, and a profit margin of around 40%, yet the P/E ratio fluctuated around 20, which is absurd for a company with such growth rates and profit margins. *All because Apple is a hardware company.*

Now take a look at Netflix. It has had YoY growth rates of roughly 25% for the past 10 years and a profit margin of around 30%, yet the P/E is constantly between 100-300 just because it is an internet company.

Apple is a company that gets at LEAST $700 from their users every 2 years. Netflix is a company that gets at MOST $300 from their users every 2 years. Apple gets more revenue, more profit, AND higher growth rate than Netflix, yet it has a P/E ratio 10x lower than Netflix, all because Apple is a hardware company.

We all know Tesla is severely undervalued. It has every characteristic of a fast growing internet company. It has unprecedented revenue growth rates that will only grow as the EV and energy industry grows exponentially. It has industry leading gross margins of 25-30%. In fact, Tesla easily has higher growth rate and profit margins than most internet companies, but because it is a hardware company, and worse, a car company, the growth premium will never be properly valued by the market. Therefore, Tesla's stock price will only begrudgingly rise with every quarterly report showing huge YoY revenue growth that forces the stock price to increase just to the point above absurdity. Basically, stock price roughly tracks revenue because currently the P/S ratio is beginning to get absurdly low and can't really get any lower.

The only thing I can see Tesla being valued somewhat properly for its growth premium is if Tesla releases a working full self driving technology, which currently commands insane valuations. Otherwise, I see Tesla being undervalued for the long term, with a consistently low P/E ratio that doesn't price in any growth premium. This is still not a bad place to be for long term investors as the stock will still appreciate very nicely as it'll begin to track revenue, but it is very disheartening for shareholders to never get the huge stock price rally as vindication for correctly forecasting the real growth story of Tesla. With this realization, I am no longer expecting a huge rally in Tesla's stock price due to the market realizing EV growth and energy growth. I only expect a huge rally for full self driving, which is a big unknown.

 

[BrianZ]

P.S. I believe there is another scenario where Tesla would be fairly valued, and that's if they're private. It seems private companies are generally at least fairly valued, if not a bit overvalued. I'd bet a private Tesla's share would be going for at least $1000 (I.e, triple the current valuation), and investors would still clamor to get in on every opportunity to invest.

 

[humbaba]

I agree with you on pretty much everything, except I think you have misplaced faith in autonomy. For example, Waymo has been valued at $170B and it has nothing other than autonomy. So any company that was better placed for autonomy would have to be more highly valued, right? But the fact is that Tesla is beyond any shadow of a doubt 1) farther along and 2) brighter future. And yet, because it is saddled with being "a car company" it stays at about a third of that valuation. It is patently absurd when Tesla is so clearly and obviously the front runner in autonomy with a nigh unassailable lead.

Another thing to keep in mind: if your thesis is that $TSLA will be appropriately valued when it proves out FSD be prepared for an indefinite wait. While I realize that there are those here that believe it is just around the corner, there are just too many problems for it to be plausible for the foreseeable future. I'm not sure its worth hashing out all of the problems with FSD here, but my biggest concern is that Musk jumps the gun and calls FSD done before it is. Tesla already gets slammed for even the slightest hiccup, and every attempt is made to associate any accident with autopilot. A not-ready-for-primetime FSD is just asking for far, far worse.

Perhaps I'm overly optimistic, but I think that in the long run (maybe very long run) $TSLA will eventually be valued appropriately. My investment thesis is, essentially, that $TSLA is so massively undervalued that it only has upside. Unfortunately, it is also clear that if this upside will ever be realized it isn't anytime soon. In the short term the only way to make money off of $TSLA is to swing trade. If I was a smart investor I'd sell and short sell $TSLA when its high and buy and cover when its low. But I'm not a smart investor so I do all that I'm cut out for -- which is buy and hold.

 

[anthonyj]

Or Tesla may simply be growing into its valuation. And people are swing trading because it’s range bound for years and is easy money

 

[Carl Raymond]

‘Always’ is a long time. Ultimately Tesla stop growing and dividends and straight math determine actual value.

 

[Singuy]

I think the biggest Achilles heel to this stock is that it's a NEW car company. So if you compare any new car company to their peers, bankruptcy is the only future evaluation. Even with Tsla having positive operating cash flow, it's still hard for major investors to gauge if the car company will one day belly up or not. So you'll have a huge amount of that priced in which is why Tesla is stuck at 300 when it was bleeding money and when it's making money. It's a tug-o-war between bears and bulls. There's not one bull in the world that can claim Tesla is victorious and gain continuous demand with zero competition in sight from any legacy automaker.

The fact that Tesla is not bankrupt is in uncharted territory and the market is proceeding with caution..which means one profitable quarter at a time. I don't think the company is "undervalued". Based on growth, it is. Based on an up and coming start up car company in which historically 100% of these companies goes bankrupt, it's trading at a pretty penny. This is one of those stock that will suddenly generate a stupid amount of money while putting other car manufactures out of business is when people finally realize oh wait..Tesla is actually the future....

Amazon didn't put Sears, ToysrUs and malls out of business overnight.

 

[Brando]

Expecting "fairness" or "honesty" or "excellent analysis" or "true value" from the stock market - seriously??
It is a Casino and good for those that figure out how to play.

If all you value is money ..... well the LOVE of money is the root of much evil. no reply expected - just my opinion

 

[Singer3000]

Alternatively the rest of them are over-valued. I think this is particularly true of most of the Si Valley private companies (including Waymo).

I personally tend towards the view that you need concrete Model Y details for the next big break-out. The first break-out was Model S, with further growth and consolidation when it became clear volumes would be higher than first imagined (especially when combined with Model X). Then a long period trading in a volatile band.

The next big breakout was for Model 3, with the market doing what it should and looking forwards, with all the value awarded basically between the reveal and launch.

Since then, I think probably correctly not much value has been given by the market to the Semi, as the plans are still so vague (see comments even on last week's call). Roadster is really just a halo product, Solar Roof goodness only knows what's happening there. Pickup is a concept drawing. Powerwall/Powerpack/Megapack has long term promise but even quite aggressive company growth projections imply gross profit in 2019 only in the hundreds of millions rather than billions.

Which leaves us with the Model Y. This is what should hopefully finally move us out of this volatile 250-380 band to the next level. We need compelling specs at the right price, massive buzz and a clear and credible delivery path. Come the end of summer you might then have less pessimism on TSLA's valuation (though this is also dependent on no negatives elsewhere, primarily further delays to SR Model 3 capping demand or a recession doing the same).

 

[TradingInvest]

First of all, I don't view Tesla as a car company, it's a tech company revolutionizing the energy and transportation industries.

There are several ways to value Tesla. The one I most frequently use is to try to predict it's future revenue in 10~15 years.

I think after we pass the total cost parity tipping point, which is coming in 2~3 years, EV's demand will go up exponentially. I think the demand for Model Y and Model 3 will rise like a hockey stick. Basically everyone who can afford will buy these EVs, not consider ICEs anymore. This will be similar to the switching from analog phones to smart phones. EVs are fundamentally better. Much better.

The key that prevent this transition from happening is the cost. If Tesla manage to continue cut cost and keep making the cars better, the turning point should come within 2~4 years. All of these assume there is no FSD. With FSD, the game is over much quicker.

I predict within 10 years, ICE will become a niche market, EV demand rise to 80 million a year. Tesla takes 10~30% of the market. I estimate Tesla will end up producing 20%, 16 million a year, at average price $40k (part of it is inflation). Gross margin 20%. That's $128B gross margin each year. Use whatever discount rate you feel comfortable, you can estimate the translated valuation for today.

I think Tesla's fair value as of today is around $200B. Some people say the market is always right, I would say it's generally true, but I found in many cases the market was quite stupid. BRK has been the best example that the entire investment community never understood what BRK is about, and why it was always undervalued. The stock went from $7.5 to $300,000 in a few decades. If those investors went to a few shareholder meetings, they probably would have understood it better and jumped on the train. Basically BRK has $100B insurance premiums that they can invest and keep the gain (the premiums will have to be paid out at a later rate, the combined rate is around 100%). This sound small, but they continue to get more insurance business, so the float stay at the size and even continue to grow. If you give Warren Buffett $100B interest free money and let him to invest it for 30 years, how much profit will he generate? That's the key of how to value a company like BRK.

Back to Tesla, Tesla is a very unique company, you can compare it with the early Apple, but at a much larger scale. When Apple got the iPhone out, Wall Street said it can only take 1~2% of the phone market and the margin will come down. They are stupid. The right way to think was Apple would end up selling a few billion iPhones with $300 margin on each phone, plus the service income down the road.

Tesla very likely will sell 200 million EVs in the long run, with $10k margin on each car, that alone will generate 2 trillion dollars margin. Those shorts will never understand Tesla. They also shorted Amazon, Apple, and BRK in the past. They only understand book value and next year's P/E. Real thinking is very difficult for those shorts. I could be wrong, but I just stay long and prepare more cash for the next pullback.