Tesla (NASDAQ: TSLA) It is among the most popular stocks of 2020. As of the market close on Monday, the shares of the electric car maker have risen more than 250% so far this year. Meanwhile, the S&P 500 it is down 2%. The rise in shares reflects growing investor confidence in the company’s long-term prospects as Tesla demonstrates impressive performance.
But has the action been advanced? After all, stock valuation is now priced not only in massive business growth, but also in significant improvements in profitability in the years to come.
Are the shares priced perfectly? 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 kind of growth the current stock price has.
For Tesla’s market capitalization to grow at an average rate of 10% per year for the next 10 years from its current level, the company would have to have a market capitalization of approximately $ 721 billion within 10 years. What would it take to get such a high price? Tesla would likely need an annual net income of around $ 14 billion to $ 15 billion. Assuming the company is trading at 50 times earnings (a reasonable price / earnings ratio if Tesla really shows it can grow that fast in the next 10 years), Tesla could have a market capitalization of about $ 700 billion to $ 750k. million in 2030.
What kind of sales growth could it take for profitability to reach this level? If Tesla can achieve BMWWith a net profit margin of approximately 5% in 10 years, the company would need sales of approximately $ 280 billion to $ 300 billion by 2030 to achieve a net income of approximately $ 14 billion to $ 15 billion, which which implies an average annual sales growth rate of approximately 27%.
Are the expectations too high?
Given that Tesla’s revenue has grown much faster than 27% annually in the past five years, the above scenario may sound likely to some investors. But there are some important risks to the assumptions of this model. First, there is a possibility that profitability is more useless than Tesla shareholders anticipate. Furthermore, if Tesla’s growth slows significantly towards the end of this 10-year period, investors may not believe that the shares of the electric car maker are worth 50 times earnings at the time; And if the stock demands anything less than a price / earnings ratio of 50 in 2030 (at $ 14 billion to $ 15 billion of net income), the performance of the stock hereinafter could be lower.
Of course, there is always a chance that Tesla will exceed even the highest investor expectations. Perhaps, for example, electric cars become more profitable than gasoline-powered cars, leading to a net margin much greater than 5%. Additionally, if Tesla’s software and driver assistance features improve significantly and help the automaker expand its technological leadership over the competition, the company could make more money from its vehicle software than the market anticipates.
The spectrum of potential results is huge. But given the dizzying growth in Tesla stocks today, investors may want the stock to fall to help reduce the risk of investing in a business that may be perfectly priced.
Big catalysts on the horizon
Does this mean that current Tesla shareholders should sell their Tesla shares? Not necessarily. In light of the strong performance by the electric car maker 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 to hold on. Of course, this assumes that shareholders are willing to withstand significant volatility. After such a big race for Tesla stocks, volatility is almost a fact in the months ahead.
Tesla’s business may still be early in its growth story. Even in the short term, the automaker’s growth could be significant. The Model Y launched by the company in March, for example, has the potential to sell more than the company’s best-selling car (Model 3). After all, SUVs like the Model Y often outperform sedans in many markets. Additionally, Tesla is notably planning a significant expansion of production capacity this year, and does not plan to slow down next year.
At the end of this month, investors will get a timely window into Tesla’s business to see if it lives up to expectations. The electric car maker reports earnings on July 22.
