Elon Musk flew to Poland on Sunday 21 January. The visit is not business-related, but let's focus on his company Tesla, which supplies popular electric cars, including the Cybertruck model, among others. Currently, Tesla's shares are down 30% from their historic highs, while the main US stock index is hitting new highs. For this reason, can Tesla shares be an attractive investment? To assess this, it is useful to focus on the current valuation because, according to Professor Aswath Damodaran's teaching, "keep your eyes on the price" before making investment decisions.
Table of contents:
Tesla's current successes
There is no denying the success the company has achieved, with revenues growing by 447% over the past five years, an average annual rate of 40%. However, the latest financial report for Q3 2023 shows that momentum has slowed to 9% per annum.
Despite the slowdown, the company's net profit margin is 11%, down from its historical level of 15%. It is worth noting here that the industry average is barely 3.5%. The company's return on equity currently stands at 21.5%, while the industry average is 9.8%. These metrics clearly demonstrate Tesla's strong competitive dominance in the market. The company continues to grow despite the unfavourable macroeconomic situation.
This success seems to be driven by high levels of reinvestment. Tesla invests as much as 78.4% of the profits it generates, while at the same time the debt-to-equity (D/E) ratio is only 0.05. Another aspect that demonstrates the security of Tesla's financial situation is the lack of significant problems in settling current liabilities, as the company's strict quick ratio (QR) is 1.18. This means that the company would be able to live on its funds alone for more than a year.
We know from the latest report that Tesla is now focusing on reducing costs per vehicle, maximising delivery volumes and investing in AI, among other things. It has also increased computing resources for AI training and expanded the Optimus robot project. The humanoid robot is now being trained with AI to perform simple tasks, which goes hand in hand with improving its hardware.
Source: Macrotrends
Market forecasts for Tesla
Regardless of a company's current success, let us remember that investing is about buying assets below their intrinsic value. It is worth recalling the definition of value from a financial perspective in this context. The value of an asset is the present value of all future returns from that asset to the investor. Currently, the expected (discount) rate of return for Tesla is 17.4% and the reinvestment rate has remained at 78.3% over the past four quarters. With these assumptions in mind, Tesla's current projected annual earnings growth rate by the market is as high as 64.8% for the next five years, after which we assume a partial saturation of the electronic car market and a decline in the growth rate to 4.9%.
Source: Conotoxia’s own analysis
Is Tesla stock a good investment?
Despite the current tremendous successes, Tesla's average annual revenue growth rate over the past 5 years has been 40%. In order to assess whether the company's current valuation is adequate, we need to consider the probability with which we can forecast average annual earnings growth of around 65% over the next 5 years. We can expect the answer to this question on Wednesday (24.01), when the company's financial results for Q4 2023 will be announced. In assessing the company's success, it is also important to consider the growing competition in the electric car market, particularly from China. For example, Chinese company BYD has produced more electric cars than Tesla in 2023. It is also worth noting that Tesla's November valuation by the aforementioned New York University professor Aswath Damodaran, assumed an intrinsic value of US$180 for the company's shares, about 15% below the current price.
Source: Conotoxia MT5, Tesla, Daily
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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