Shares of company for electric cars Tesla (NASDAQ: TSLA) have been on a tear recently. In the past year, the share has risen more than 750%. In the last five trading days alone, shares have risen almost 40%.
The enormous growth rate of growth in the last year was initially driven by business performance better than expected. Lately, however, news of an upcoming stock split seems to be the primary driver for sharp gains.
Has the supply run too far? Or is the supply actually attractive at this level?
The Model 3. Image Source: Tesla.
Investors love Tesla’s growth story
It is not surprising that investors have applauded Tesla’s recent business performance by buying up shares in the past year. The company went from regularly missing delivery targets and production milestones to handing over many of its plans. Last year, for example, Tesla went from groundbreaking job to initiative of production form in less than a year at a new factory in Shanghai. This year, the automaker began delivering its Model Y about six months ahead of schedule.
More recently, Tesla said the Model Y impressively achieved a positive gross profit margin in its first quarter of production. Meanwhile, the company’s Model 3 has become the best-selling car in China, which is the largest car market in the world. And construction at yet another car factory in Berlin is going fast.
Confirming the company’s growth story, Tesla reiterated pre-COVID guidance for half a million deliveries by 2020, despite continued factory outages in both the US and China earlier this year. If the automaker achieves this (and there is a high chance it will), deliveries will increase by 36% year-on-year by 2020.
Finally, investors are likely excited about the massive addressing market for Tesla. Total world sales of electric cars in 2019 were about 2 million, accounting for 2.6% of car sales worldwide in the year, according to estimates by International Energy Agency.
Rating applies
Despite Tesla’s strong momentum in car sales and its enormous growth potential, there is one major factor that makes the automaker’s shares less attractive today than they might seem on the surface. After a run of 750% -plus, the valuation of the stock has been postponed, even if they are viewed alongside a pink outlook for the company.
Image Source: Getty Images.
With shares trading at $ 1,888, the market capitalization of the stock is $ 352 billion. However, the subsequent 12-month free cash flow from Tesla is just $ 800 million. With a premium like this, investors have essentially a price of 20% to 35% average compounded growth of income year and year and substantial improvements in profitability for a decade or even longer. In other words, Tesla stock can now be priced for perfection.
Sure, it’s always possible for the underlying company to continue to exceed even these high expectations, which is why today’s share price is looking backwards. But investors should keep in mind the recent torrid run of the stock has made stocks significantly less attractive than they even were just a few months ago.
While an upcoming five-for-one action split may have brought more interest to the company for the moment, investors should always keep appreciation when making investments. There is no telling when the market may decide to price Tesla stock more reasonably. And when that day comes, the chances are that investors in the automaker will never choose to repay such a significant premium for Tesla’s free cash flow, and ultimately hinder long-term returns at these levels.
