Why We Increased Our Price Estimate For Tesla, But Still Remain Bearish On The Stock

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We have updated our price estimate for Tesla (NASDAQ: TSLA) stock from $250 per share to about $350 per share, marking an increase of about 40%, driven by the company’s expanding production capabilities, improved cost management, and strong product pipeline, which should enable it to post relatively sustained profitability starting from 2020. Our current price estimate values the company at about 60x its projected 2020 earnings.  That said, we continue to believe that Tesla is overvalued. The current market price of about $450 implies that the stock trades at over 75x projected 2020 EPS. We believe this multiple is high considering the mounting competition in the EV market from mainstream automakers, potential risks to the global economy that could hurt broader auto sales, and concerns relating to the timing of the company’s Chinese production debut, as electric vehicle sales in China have been on the decline in recent months.

Below, we take a look at some of the key reasons for our price increase:

  • Tesla’s deliveries have recorded strong growth over Q4, rising by 23% year-over-year to a quarterly record 112k units, beating estimates and enabling the company to make good on its promise of delivering over 360k cars over 2019.
  • Tesla has also made good progress on the cost front, improving its gross margins in recent quarters on account of higher volumes which have helped fixed cost absorption and lowered labor hours per vehicle. The company is also scaling back on its operating expenses.
  • Production will expand further, as the company has commenced production at its factory in China ahead of schedule. The plant, which will produce 250k cars a year over the first phase, is likely to turn profitable relatively quickly, as CapEx for Model 3 per unit in China was 65% lower compared to the U.S.

We break down the stock price estimate into 4 drivers – revenue, net income margin, number of shares, and P/E multiple. To see how each of these drivers is performing, view our interactive dashboard analysis – Tesla Valuation: Expensive or Cheap?

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Revenues

  • Total Revenues have increased from $7 billion in 2016 to $21.5 billion in 2018, and are expected to stand at $29.3 billion in 2020.
  • The improvement will be driven primarily by higher Automotive Revenues, with the ramp-up of the Model 3 sedan and production from Tesla’s Chinese plant.

Net Income

  • Tesla has remained loss-making, with Adjusted Net Income standing at -$0.4 billion in 2016 and -$0.2 billion in 2018. We expect the company to post a net profit of $1 billion in 2020.
  • The improvement will likely come from higher Revenues as well as improving Net Margins, as automotive revenues are likely to scale up faster than operating costs.

Earnings Per Share

  • EPS has improved from -$2.87 in 2016 to -$1.33 in 2018. We estimate EPS to be $5.80 in 2020.

Price Estimate 

  • Our Price Estimate of $348 For Tesla’s Stock is based on our Detailed Valuation Model and implies a 60x P/E Multiple on expected 2020 EPS of $5.80.

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