Is Tesla Stock a purchase right now?


Tesla (NASDAQ: TSLA) is among the hottest stocks of 2020. At the close of the market on Monday, the shares of the manufacturer of electric cars increased by more than 250% since the beginning of the year. Meanwhile, the S&P 500 is down 2%. The rise in the stock reflects growing investor confidence in the company’s long-term outlook, with Tesla showing impressive performance.

But has the stock gone ahead? After all, the valuation of the action now leads not only to massive growth in activity, but also to a significant improvement in profitability in the years to come.

Do stocks have a perfect price? Or is there still room for Tesla stock?

Model 3. Image source: Tesla.

Tesla stock valuation

It is helpful for investors to understand exactly what type of growth is in action today.

In order for Tesla’s market capitalization to increase at an average rate of 10% per year over the next 10 years from its current level, the company would need to have a market capitalization of approximately $ 721 billion in 10 years. What would it take to order such a high price? Tesla would likely need around $ 14 billion to $ 15 billion in annual net income. Assuming that the company is trading at 50 times its profits (a reasonable price / profit ratio if Tesla really proves that it can grow as quickly over the next 10 years), Tesla could reach a market capitalization of around 700 to $ 750 billion in 2030.

What type of sales growth would it take for profitability to reach this level? If Tesla can reach BMWWith a net profit margin of around 5% in 10 years, the company would need sales of around $ 280 billion to $ 300 billion by 2030 to reach net profit of around $ 14 billion to $ 15 billion, which implies an average annual sales growth rate of around 27%. .

Are expectations too high?

Since Tesla’s revenues have grown much faster than 27% a year over the past five years, the above scenario may seem likely to some investors. But there are major risks for the hypotheses of this model. First, there is a chance that profitability will turn out to be more futile than Tesla shareholders think. Also, if Tesla’s growth slows considerably by the end of this 10-year period, investors may not believe that the automaker’s stock is worth 50 times profits at the time; and if the stock posts something less than a price / earnings ratio of 50 in 2030 (on $ 14-15 billion in net income), the stock’s performance by then could be lower.

Of course, there is always a chance that Tesla will exceed even the highest expectations of investors. For example, electric cars may become more profitable than gasoline cars, which leads to a much higher net margin than 5%. In addition, if the functionality of Tesla’s software and driver assistance improves significantly and helps the manufacturer expand its technological lead over the competition, the company may be able to make more money with its vehicle software than the market expects.

The range of potential outcomes is enormous. But given the wild growth that is taking place in Tesla stocks today, investors may wish to hope that stocks will fall in order to reduce the risk of investing in a price-perfect venture.

Big catalysts on the horizon

Does this mean that current Tesla shareholders should sell their Tesla shares? Not necessarily. In light of the automaker’s solid execution recently, including the launch of a new factory in China in 2019 and the start of Model Y deliveries earlier this year, investors may want to continue holding on. Of course, this assumes that the shareholders are ready to bear significant volatility. After such a huge race for Tesla stock, volatility is almost a given in the months to come.

Tesla’s business could still be at the start of its growth story. Even in the short term, the manufacturer’s growth could be significant. The model Y launched by the company in March, for example, has the potential to overtake the company’s best-selling car (Model 3). After all, SUVs like the Y model often outpace sedans in many markets. In addition, Tesla plans to significantly increase its production capacity this year – and does not plan to slow down next year.

Later this month, investors will have a timely window into Tesla’s business to see if it meets expectations. The electric car maker announced its results on July 22.


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