As Tesla's value soared past $800B this week, Elon Musk became the richest man in the world. The bears lie in wait, while the bulls believe the price will never come down. Why is the stock so high to start with?
Here's my take.
Tesla is worth more than just car sales. While I know this instinctively, I wanted to vet my thoughts with source information – Tesla financial reports.
So for the first time as a trader, I'm doing a bit of fundamental analysis of a company. Let's see if my hypothesis pans out.
As I was reading the footnotes to the consolidated financials, the following sentence immediately jumped out at me:
We design, develop, manufacture and sell high-performance fully electric vehicles and design, manufacture, install and sell solar energy generation and energy storage products.
Tesla Is Also An Energy Company
Tesla has two chief lines of business – cars and energy. The car line includes sales and leases. The energy line includes generation and storage. They also receive tradable automotive regulatory credits for selling cars with zero emissions, which they sell to other automotive companies and regulated entities who can use the credits to comply with emissions standards and other regulatory requirements.
On page 34 of their footnotes, they state the following:
Our mission is to accelerate the world's transition to sustainable energy. [1]
One of Tesla's energy products is called Megapack, a battery used for large-scale grid energy storage. This product is designed to be used by utility companies, to store energy and used by the grid to help sustain periods of peak electricity demand.
In Feburary 2020, Pacific Gas and Electric Company received approval to deploy 449 Megapacks at the Moss Landing substations in Monterey County, California.
And this is only the beginning.
Tesla Cars
The third quarter of 2020 was a record for Tesla vehicle production. In the next year, the plan is to increase production rates for the Model 3 and Model Y.
The cost of automotive sales includes direct parts, material and labor costs, manufacturing overhead, shipping and logistic costs, vehicle connectivity costs, allocations of electricity and infrastructure costs related to their Supercharger network, and reserves for estimated warranty expenses.
In order to increase future production, they are building factories in Berlin Germany, Texas, and Shanghai China, called Gigafactories.
They plan to develop and manufacture their own battery cells in the future, reducing the cost of their vehicles and increasing profit margins. Will they then start selling batteries to other electric car companies? Take a guess.
Gross margins on automotive sales increased from 19% to 25% in 2020.
Services and Other
Tesla generates ancillary revenue from non-warranty maintenance services, retail merchandise, and non-Tesla vehicle trade-ins.
This revenue will likely grow at a rate similar to their automotive sales.
Financial Analysis
Many analysts missed on Tesla's ability to leverage its stock price to raise capital vs. taking on debt, like other companies in the industry. In fact, Tesla's long-term debt to equity ratio is half of the industry average.
Tesla is using its stock issuances to buy out competitors and develop technology.
They currently have a 25% share in automotive batteries, which is expected to grow.
| Ratio | Tesla | Industry |
|---|---|---|
| P/E Ratio TTM | 1,616.82 | 8.96 |
| Price to Sales TTM | 27.45 | 1.88 |
| Price to Free Cash Flow TTM | 423.39 | 835.82 |
| Return on Equity TTM | 4.76% | 8.45% |
Because Tesla is such a young company in a mega-growth phase, it makes more sense to use a Forward P/E vs. a Trailing P/E, or a P/E ratio based on future earnings projections vs. a TTM (trailing twelve month) calculation.
According to CNBC, electric vehicle sales are predicted to surge in 2021. They estimate production of autos in 2021 of 1.3M. Assuming they sold all units, Tesla would make approx. $43B in revenues using an estimated price of $33k per vehicle.
That's nearly double the annualized revenues from autos for 2020.
Estimated earnings per share for 2021 are around $2.76. At the current stock price, the Forward P/E is 296 in 2021, and is expected to drop lower in 2022.
Summing It Up
Given the enormous growth potential of Tesla as both an energy company and an auto maker, with more service and sales lines in the pipeline, I believe Tesla is a great long-term buy.
They've made it their mission to help the world transition to sustainable energy sources. I'm not betting against that!
However, given the huge run-up over the last couple of weeks, I wouldn't be surprised to see a short-term pullback. I'm hoping for one – so I can buy in.
A correction of 15% would bring Tesla back down to earth, and provide an opportunity to buy in. Couple a price drop with a stock split, and those of us with smaller accounts may have a chance to buy in.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. My opinions are my own and are not to be used as investment advice.
[1]Tesla, Inc. Notes to Consolidated Financial Statements, Q3 2020, pg. 34
