With a market capitalization of more than $ 200 billion, Tesla Inc. (NASDAQ: TSLA) is the world’s most valuable automaker as of July 2. More than anything, the company’s shares have challenged the odds of famous short sellers, including Andrew Left of Citron Research and David Einhorn (trades, portfolio) of Greenlight Capital. According to Wedbush analyst Dan Ives, the stock could rise to as high as $ 2,000 at best, while its baseline scenario indicates an intrinsic value estimate of $ 1,500 per share, suggesting that Tesla is still undervalued by about a 24% at the market price of around $ 1,208 on July 2.
CEO Elon Musk has faced several litigation issues with the Securities and Exchange Commission for being vocal on social media platforms about Tesla’s unexpected success. On the positive side for investors, Musk has pressured the company to sometimes achieve the unthinkable and deliver the promised numbers. For example, in early 2019, the company presented a delivery forecast of 360,000 to 400,000 vehicles for the year. At the beginning of the fourth quarter, Tesla needed to deliver at least 104,000 vehicles to achieve this goal, which many analysts thought would not be possible. Defying the odds, the company completed more than 112,000 deliveries at a record rate to meet its goal. According to many analysts, the bigger picture than Musk’s life is not only beneficial to Tesla’s stock value, but is also a determining factor in the efficiency of his employees.
The company also reported better-than-expected figures for the second quarter of this year. The analyst consensus estimate was that Tesla would deliver 83,000 vehicles in a quarter that was dominated by record unemployment levels in the United States and financial difficulties in many other regions, including China. However, the company reported more than 90,000 deliveries for the three months ending June 30, once again highlighting its ability to counter the trend and remain relevant even in unprecedented times that saw other automakers struggle to achieve your sales goals.
According to data collected by Bloomberg, global sales of electric passenger vehicles have grown from 450,000 in 2015 to 2.1 million in 2019, which is a clear indication of the exponential growth seen by this industry. Bloomberg projects that the share of electric vehicles in total new car sales will increase to 10% by 2025, which would be a significant improvement from the 2.7% reported in 2019. There are multiple drivers behind this commercial sector.
First, governments continue to encourage consumers to replace traditional vehicles with electric ones by offering subsidies. For example, in the United States, there is a $ 7,500 consumer tax exemption for the first 200,000 vehicles sold by an automaker. Although Tesla has already breached this limit, the company is in talks with regulators to increase this allocation substantially to promote the use of green vehicles. In other parts of the world, many developed and developing regions, such as Norway, China, Canada, India, the Netherlands, and Germany, have introduced various measures to promote the use of electric vehicles.
Second, the production capacity of many leading automakers is projected to increase in the coming years, which would help brand-loyal consumers choose electric vehicles from their preferred automakers. Currently, the number of models available is very limited, leading consumers to prefer traditional gasoline-powered vehicles.
Source: Deloitte
Third, technological developments related to battery efficiency will boost consumer sentiment in the future. The consensus estimate is that an electric vehicle’s battery will last for about eight years, or 100,000 miles. Contemporary technology Amperex, a Chinese battery maker, announced in June that it is ready to develop a battery that could last a million miles. This technology is widely believed to be developed in collaboration with Tesla, which would be an innovative development that could establish its dominance in the industry. In any case, this efficiency improvement will help automakers sell more electric vehicles in the next decade than current estimates. Commenting on this recent development, Ives wrote:
“If you talk about batteries that can last twice as long for the same price, that completely changes the math for the consumer. Iron phosphate batteries are safer and can have a second or third life as storage for electricity.”
Based on these developments, it is reasonable to conclude that the electric vehicle industry will continue to grow at stellar rates for the next decade.
It is no secret that dominant players in a high growth industry are well positioned to improve their income and earnings in the future. This is exactly the case with Tesla as the clear leader in the electric vehicle industry. As of October 2019, Tesla had a market share of approximately 16%. The Tesla Model 3, on the other hand, reported nearly triple the sales of its closest competitor in the first 10 months of 2019, establishing the company as the undisputed leader in this space.
Source: Intel Inverter.
The company is also aggressively investing to ensure future growth. For example, it opened the Tesla Gigafactory 3 in Shanghai in late 2018 in an attempt to manufacture vehicles locally in China to meet the massive demand for its products. This type of investment will help the company to remain leaders in this industry for many years.
Finally, Tesla’s moves in the commercial truck market are likely to pay off in the future. The all-new Tesla Cybertruck is expected to hit the market in 2021, ushering in a new start for the electric vehicle giant. Global Market Insights projects this industry to grow to $ 160 billion by 2025, up from $ 120 billion in 2019. Taking advantage of this growth opportunity could be a catalyst in the company’s quest to become a satisfying automaker. consumer tastes.
Before selling Tesla short, an investor should ideally consider what Charlie Munger (Trades, Portfolio) had to say about the stocks in February. In an interview with CNBC, the guru said:
“My thoughts are two. I would never buy Tesla and I would never sell it short. I have a third comment. Never underestimate the man who overestimates himself. I think Elon Musk is peculiar and may be overestimated, but he may not be. time “.
This tip seems to be aging well. Tesla is a highly volatile stock and even if an investor believes the company is significantly overvalued, going into a short position might not be the wisest decision. Many things could go well for the company as a result of favorable prospects for the electric vehicle industry.
Although stocks appear to be overvalued from a purely fundamental perspective, the narrative behind the company is stronger and more relevant than ever. Aswath Damodaran, a professor at the Stern School of Business, considered the “Dean of Valuation,” believes that ignoring the story behind a company is a fatal mistake made by many novice investors. According to him, market movements that are irrational from the numbers perspective can often be explained by the underlying narrative behind the company. In a blog post published in 2014, he wrote:
“While your bottom line may be comprised of forecasts for revenue growth, profit margins and reinvestment, it is the story that ties these numbers together that represent the soul of the valuation. That said, the balance between stories and numbers can vary from company to company and, for the same company, it can change over time. For most companies, history comes first, followed by numbers, and for others, numbers tell the story. There are some companies that I would classify as history stocks, where history is so dominant both in the way people value stocks and in what determines their value that the numbers fade into the background or have a side effect. “
Tesla is a company that has not yet released numbers. At the same time, its market value is tied to the success of the electric vehicle industry, which many analysts consider one of the business sectors that would see exponential growth in the future. Therefore, concluding that Tesla is overvalued without incorporating this factor is likely to result in an erroneous estimate of intrinsic value according to Damodaran, who has been tracking the stock for quite some time.
In the baseline scenario, Tesla is likely to hit new highs. Even if an investor is bearish on the prospects for the company, it would be wise to avoid short selling the stock.
Disclosure: I do not own any actions mentioned in this article.
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