Tesla Inc (NASDAQ: TSLA): A Tradition of Exuberance

Tesla is motoring nearly 5% higher on the session at the time of this writing. That’s extraordinary, or is it? Tesla has a tradition of making fundamental investors moan and the momentum investors cheer.

The first example of this was 2013. At the time, the company had a much smaller float and over 40% of its float shorted. It was coming off a period of global central bank liquidity injections that surpassed even the great financial crisis. Money and cheap credit were sloshing around, and it made its way into Tesla. The stock rocketed higher from a split-adjusted value of around $5.50 to nearly $40.

After that episode, it took another three years before it would make a rally of any magnitude in early 2017. The price rallied from $36 to over $77 before settling in for another two-year dormant period.

Since the Federal Reserve stepped back into expanding its balance sheet in September of 2019, the price of Tesla has risen from a split-adjusted value of $44 to over $650. That’s even bigger than 2013’s stupendous rally!

Tesla’s Next Move

If there is one thing that we can learn from Tesla is that it pulls years of returns forward during these rallies. As you begin to examine the current price level of Tesla, it appears the only uncertainty is when the craziness will end and how long it will take the stock begin to move again.

For many investors, it appears that is where the analysis stops. There’s very little questioning of whether Tesla deserves this lofty price and how much downside may be available when the bullish fever breaks.

As you consider the next move, it shouldn’t be quibbling about whether Tesla can increase another $100, but rather the likely asymmetry of the movement in TSLA in the coming one to three years.

Tesla Growth & Valuation

I know, you’re probably thinking it’s silly to quibble over valuation on a stock like Tesla. Normally, I would agree. However, we are at a better point to understand the current valuation and potential of the company from an earnings and revenue perspective. Here are two things to consider about Tesla’s future:

1. Electric vehicle sales growth
2. Tesla market share

Growth

A Research and Markets estimate for EV sales growth is 30.67% until 2023. There is some serious potential for a company in the EV market based on those numbers. However, the recent trend in these types of companies has many investors wondering how much of that potential is priced in.

The next consideration is how much of that projected sales increase will come to Tesla. Tesla is projected to account for over 80% of U.S. EV sales and nearly 20% of global EV sales. Tesla is currently THE EV company globally. However, that type of monopoly type position typically doesn’t last as competition starts to enter.

It’s anticipated that 66 new EV models will be introduced in 2020. Company’s like Volvo plan to have 50% of their sales be electric vehicles by 2025 and sell 1 million vehicles by that date. Not to mention every other major car company has their sites on TSLA.

Looking at analyst projections for sales growth you see competition eating into market share. Currently, Tesla is expected to grow their 2021 sales by 46%, 19.8% in 2022 and 11.7% in 2023. Assuming a CAGR of over 30% per year, that forecast shows a failure of TSLA to keep up with industry growth trends.

Valuation

Tesla is currently trading near all-time highs for virtually every valuation ratio you can use. The median value for these multiples is like distant images in the rearview mirror.

For example, let’s look at price-to-sales (P/S). Given that fact that many companies in this industry aren’t profitable, sales is a good benchmark. Currently, TSLA has a P/S multiple of 21.75, which is greater than 97% of companies in its industry.

You may be looking at that statistic and saying, “yeah, but it’s Tesla.” I get it, and so let’s take the projected sales for 2023 and calculate a forward P/S number. With projected 2023 revenue by analysts of $60.78 billion and shares outstanding of 415.6 million, that leaves the company with a revenue (sales) per share of $146.24. Using the current price of $638, that gives a P/S number of 4.36. That would place the company’s P/S multiple just below the 10-year median of 6.76.

Conclusion

Tesla is making some huge advancements in profitability, generating operating cash flow and protecting its market share. However, as stiffer competition enters their space, the ability to maintain will be difficult. That is seen by the analyst revenue forecasts. If the numbers play out as analysts are projecting, that will have Tesla being in a more reasonable position for another expansion in its P/S, but with possibly a lower growth outlook. This is the process of a company becoming mature and even Tesla will experience the same pains that many others have experienced. The question is whether you’re willing to experience it with them.

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