Tesla: Automaker Or Tech Company? My Take And My Investing Choice

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Tesla, Inc. (NASDAQ:TSLA) is 1 of those stocks - and companies - very difficult to constitute astir without being caught successful nan conflict betwixt fans and haters. This is why, though rather willing successful nan automotive industry, I person been hesitant to write astir it. In truth, location has been a batch of buzz astir electrical vehicles ("EVs"), and I deliberation it difficult to contradict Tesla was a banal that knowledgeable a batch of hype, starring to utmost valuations. This has made maine cautious astir it, arsenic I cognize buzz and hype tin beryllium breathtaking but tin lead to rash investing decisions.

To beryllium clear from nan opening of this article, I americium nary Tesla detractor. However, I americium nary Tesla investor, either. I do deliberation Tesla is simply a awesome company, whose early is astir apt going to beryllium rather bright. On nan different hand, there are a fewer things astir nan banal that norm it retired of my portfolio wherever I really ain 3 different automakers.

In this article, I will stock for nan first clip my position connected Tesla, hoping to coming my thesis arsenic objectively arsenic possible. At nan aforesaid time, I would for illustration to show why I americium presently building up a position successful what seems to maine an underestimated competitor of Tesla.

The large mobility astir Tesla

The first mobility I had to find an reply to measure Tesla was nan following: what benignant of institution do I deliberation Tesla is?

We mostly find 2 answers that revolve astir these 2 concepts:

  1. Tesla is simply a tech company
  2. Tesla is an automaker.

I cognize things tin beryllium much complex, but arsenic acold arsenic my investigation goes I really deliberation this is nan crossroad wherever 2 different investing views and strategies diverge.

I find myself agreeing pinch nan 2nd answer: Tesla is an automaker. This is somewhat supported by what nan institution states successful its 10-k.

We design, develop, manufacture, waste and lease high-performance afloat electrical vehicles and power procreation and retention systems, and connection services related to our products. We mostly waste our products straight to customers, and proceed to turn our customer-facing infrastructure done a world web of conveyance work centers, Mobile Service, assemblage shops, Supercharger stations and Destination Chargers to accelerate nan wide take of our products. We stress performance, charismatic styling and nan information of our users and workforce successful nan creation and manufacture of our products and are continuing to create afloat self-driving exertion for improved safety. We besides strive to little nan costs of ownership for our customers done continuous efforts to trim manufacturing costs and by offering financial and different services tailored to our products.

To beryllium fair, these words are not only astir electrical vehicles manufacturing, arsenic Tesla besides claims to beryllium focusing connected power procreation and retention systems arsenic good arsenic connected processing afloat self-driving exertion ("FSD"). However, I spot these different activities arsenic needfully linked to nan manufacturing one. Tesla is so disruptive, and it has been a existent pioneer, but I spot it arsenic nan 1 institution that redesigns what each different automakers will request to go to past and thrive.

Why do I deliberation it important to reply this question? Simply put, it tells america what manufacture we deliberation Tesla is simply a portion of. This is rather important erstwhile we do a valuation of Tesla, arsenic we request to look astatine nan multiples of nan industry.

Tesla's financials support this view, too. In fact, if we look astatine nan income connection streams chart, we intelligibly spot really car income person nan lion's stock of full revenues, pinch $67.2 cardinal retired of nan full $81.5 cardinal (82.5%). If we see nan car conception arsenic a whole, including leasing and regulatory credits, Tesla earns 87.7% of its full revenues done activities linked to electrical vehicles.

Tesla gross streams, TSLA stock, Invest successful Tesla, Is Tesla a bully investment?

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In addition, it seems for illustration Elon Musk himself thinks astir Tesla arsenic a "volume carmaker" successful nan "automotive market," words he utilized during nan last net call.

Tesla's financials

It is difficult not to for illustration Tesla's financials, particularly if we look astatine their unfolding done nan past decade. We person a CAGR gross maturation of almost 45%, while gross profit grew astatine a CAGR of 46.5% and EBITDA saw a stunning 81.6% CAGR from 2013 to nan extremity of 2022.

In caller years, nan institution has turned profitable, and since 2020 its nett income has moved up from $721 cardinal to $12.56 billion, which is simply a CAGR of 317.31%. This is what happens erstwhile a institution yet reaches scale.

Its balance sheet is strong, pinch conscionable $1 cardinal of semipermanent indebtedness and much than $22 cardinal successful rate and short-term investments.

Free rate travel ("FCF") is besides strong, pinch $4.2 cardinal generated astatine nan extremity of 2022 vs. nan -$32.5 cardinal reported astatine nan extremity of 2013. The only flaw is that Tesla paid $1.56 cardinal successful stock-based compensation ("SBC"), which really makes nan existent free rate travel disposable to investors conscionable $1 billion. In fact, arsenic of now SBC is added to nett income to cipher nan last FCF, but, successful reality, it is an disbursal that should beryllium moved down to financing activities and beryllium accounted for arsenic an expense. Therefore, we person to subtract nan magnitude spent connected SBC doubly to offset nan existent accounting norm that sees it arsenic an addition, and past to subtract nan existent disbursal from nan erstwhile amount.

However, connected a affirmative note, Tesla seems to beryllium reducing its SBC, since successful 2021 it paid complete $2.1 cardinal for this. But, still, nan dilutive effect is sensible.

In position of profitability, nan institution is champion successful class. Here I would for illustration to show 1 of my favourite graphs Tesla shares pinch investors. We spot that, while nan mean trading value (ASP) moves down and past stabilizes astir $55,000, nan operating separator goes steadily up, coming successful astatine 17%.

TSLA stock

Tesla Q4 2022 Shareholder Deck

This is different measurement to beryllium really it was captious for Tesla to scope scale, arsenic it has done successful caller years. Now, each dollar of further gross is much valuable because of progressively bully operating efficiency.

Tesla reported 1.31 cardinal cars sold successful 2022 and expects to waste 1.8 cardinal vehicles by nan extremity of this fiscal year. Its scheme was bold, targeting a 50% CAGR from 2020 to 2023. It is alternatively easy to deliberation Tesla seems capable to scope this goal.

Tesla stock, TSLA

Tesla Q4 2022 Shareholder Deck

So, if everything is truthful bright, why americium I not investing successful Tesla?

Why I americium not a Tesla shareholder

I person immoderate perplexities astir Tesla's expectations for nan future, which inevitably effect my position of its valuation.

Before we move on, fto maine authorities erstwhile again that I americium nary Tesla bear, nor do I deliberation nan banal should beryllium shorted, moreover though it whitethorn person so reached a caller peak. However, this is not my investing style, since I look for companies to clasp for a decade aliases two.

Let maine stock what I americium reasoning astir Tesla's upcoming years.

The first point I wonderment astir is linked to what automotive conception nan institution wants to address. We saw really Mr. Musk considers Tesla a measurement carmaker. But we don't cognize precisely what benignant of measurement carmaker Tesla wants to be. Does it purpose astatine being an 8 cardinal one, for illustration Volkswagen (OTCPK:VWAGY), General Motors (GM) aliases Toyota (TM)? Does it purpose astatine trading betwixt 2 and 3 cardinal vehicles per year, for illustration Mercedes (OTCPK:MBGAF) aliases BMW (OTCPK:BMWYY) do? The reply to this mobility is rather important for a forecast.

Currently, Tesla manufactures 4 vehicles: nan Model 3, Y, S and X. While Model 3 and Model Y person a guidelines value for mass-market appeal, nan different 2 don't. Still, some Model 3 and Model Y person a starting trading value betwixt $40,000 and $60,000, which is not precisely nan value scope to reside each consumers. The different 2 models person a starting trading value astir $100,000.

Tesla has written much than erstwhile that it is committed to making its manufacturing process much businesslike to bring down nan mean trading price. However, location are different automakers that are capable to waste electrical vehicles astatine much affordable prices. Tesla whitethorn commencement manufacturing subcompact vehicles, but this would use mostly volumes complete margins, arsenic that conception is highly competitory and galore automakers are already aliases will soon beryllium producing electrical cars for this market.

The different action is that Tesla turns into a premium measurement automaker. This will make it compete pinch brands specified arsenic Mercedes, BMW, Audi, Lexus and others. While this is simply a higher separator segment, volumes are a spot lower, pinch Mercedes and BMW trading astir 2 cardinal vehicles per year. Tesla whitethorn do a spot more, but I don't spot it grabbing distant from brands pinch specified a spot each their marketplace share.

In fact, Mercedes' electrical car portfolio seems to beryllium already richer than Tesla's.

In different words, I person a difficult clip reasoning Tesla will beryllium capable to turn importantly among premium brands without uncovering difficult title pinch well-established and highly-appreciated brands.

On nan different hand, Tesla has nan advantage successful that it doesn't person to cannibalize its aged models, while each different OEMs do. However, while we are seeing nan aforesaid point happening pinch Netflix (NFLX) and its different streaming competitors, wherever nan second person to cannibalize their profitable cablegram business to build up their ain streaming platform, successful nan lawsuit of automakers, nan displacement toward EVs is really generating higher profitability.

My take: The rumor pinch Tesla's valuation and what already I ain alternatively of it

It whitethorn not sound that original saying that what keeps maine from investing successful Tesla is its sky-high valuation. But let's callback that oftentimes nan easiest and astir renowned investing principles are forgotten erstwhile buzz and hype return place. For sure, Tesla is breathtaking and this is why we should double down and caution.

On my side, I don't instantly tally distant from a banal because I spot a precocious P/E aliases a precocious P/FCF multiple. For example, staying wrong nan automotive industry, I ain Ferrari (RACE). I would ne'er comparison Ferrari to Tesla. They are excessively different. But it is conscionable an illustration to show really I americium consenting to salary a higher value erstwhile I deliberation it is worthy it.

However, nan large quality I spot betwixt Ferrari and Tesla is that Ferrari's early results are overmuch much predictable than Tesla's. Still, a jewel for illustration Ferrari trades a little multiples compared to Tesla: Ferrari trades astatine a 39 fwd P/E vs. Tesla's 58, its fwd EV/EBITDA is 21.4 vs. Tesla's 31, its P/FCF is 37.3 vs. Tesla's 44.8. And this happens while Ferrari's profitability metrics are amended than Tesla's: 24% EBIT separator vs. 16.8%; nett income separator astatine 18.4% for Ferrari while for Tesla it is astatine 15.4%, return connected equity of 40.6% for Ferrari and astatine 32.5% for Tesla.

Coming down to a much realistic comparison, truthful that we don't consequence to operation apples pinch oranges, let's look astatine Mercedes and comparison it to Tesla (in bold is nan amended consequence betwixt nan two):

Tesla Mercedes
gross profit margin 25.6% 22.5%
EBIT margin 16.8% 12.2%
Net income margin 15.4% 16.1%
Return connected Equity 32.5% 16.8%

Tesla is nan winner, but Mercedes is not very acold behind, particularly arsenic we move down nan income statement. Now, let's spot really nan marketplace prices Tesla's starring position compared to Mercedes:

Tesla Mercedes
fwd PE 58.1 5.3
fwd EV/EBITDA 31 6.8
P/FCF 44 5

To me, nan quality is excessively wide, particularly if we see Mercedes' high-quality strategy that is efficaciously managing to summation the company's profitability.

This is why I really ain Mercedes arsenic my favourite prime among premium luxury automakers.

My 3rd prime - moreover though, arsenic I person tried to explain, I deliberation we are erstwhile again astatine consequence of comparing chalk and food - is Stellantis N.V. (STLA). If we look astatine automakers that nutrient affordable vehicles genuinely addressed to customers without heavy pockets, past I deliberation nan Stellantis bull case almost speaks for itself arsenic soon arsenic we look astatine its financials and astatine its multiples. We are talking astir a double-digit separator automaker, pinch incredibly skilled management, tons of tailwinds going for it (i.e., synergies), debased geopolitical risk, etc. trading astatine unreasonable multiples of a 3 fwd P/E, a 1.2 fwd (EV/EBITDA) and a 2.3 P/FCF. I americium not kidding. The institution trades arsenic if it were to spell bankrupt tomorrow, while it is swimming successful cash.

Let maine stock my discounted rate travel ("DCF") exemplary connected Tesla, conscionable to cheque if my thesis whitethorn beryllium supported by early rate flow. Even projecting a 5 twelvemonth free rate travel ("FCF") maturation complaint of 45% and past assuming a 9% perpetual maturation complaint (very generous assumptions), I still find TSLA banal should not waste and acquisition complete $150.

Tesla valuation

Author, pinch information from SA and ain early forecast

As I said, it is not my investing style to short a banal aliases make short-term trades. I americium successful for nan agelong term. But I deliberation Tesla, Inc.'s banal sewage a spot up of itself, particularly fixed nan truth that it has reached specified volumes that will make it harder for nan institution to support connected increasing astatine nan accelerated gait investors are expecting. Many investors person for judge gained a batch of money pinch Tesla stock, while galore different person mislaid a ton of it. As for me, I support connected studying Tesla, Inc. arsenic an investor willing successful nan industry, but I don't spot TSLA banal arsenic appealing arsenic different opportunities. This is why I complaint Tesla, Inc. arsenic a hold.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Luca Socci floor plan picture

I attraction connected agelong word maturation and dividend maturation investing. I travel some nan US and nan European banal markets, looking for undervalued banal and/or for precocious value dividend increasing companies that supply maine pinch rate to reinvest. I put only successful banal of companies that tally a business I understand done nonstop experience.

Disclosure: I/we person a beneficial agelong position successful nan shares of MBGAF, STLA, RACE either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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