How Tesla Can Get To A $1 Trillion Valuation

by Trefis Team
Tesla Motors
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Tesla’s stock has rallied by about 5x this year, with its current market cap standing at about $400 billion. Can the stock continue to outperform, joining the rarefied group of companies with a $1 trillion market capitalization? It’s possible. Although Tesla stock looks pricey at current levels, if the company executes well and the markets continue to view its prospects favorably, a $1 trillion valuation remains within reach by 2025.

Our interactive analysis on Tesla Upside: How Tesla Gets To A $1 Trillion Market Cap provides a detailed breakdown of how Tesla’s value could grow 2.5x by 2025. You can modify key assumptions to arrive at your own valuation for Tesla for the 2025 and 2030 period.

Tesla’s Revenue Growth

Tesla’s Revenues can grow by 3.7x to levels of about $112 billion in 2025, from an estimated $30 billion in 2020, representing a growth rate of roughly 30% per year. While deliveries are likely to grow to close to 500k units this year, they could possibly stand at about 2.1 million cars by 2025 – a growth rate of about 35% (versus about 56% growth for the 2015 to 2020E period). This is possible considering three trends 1) Tesla is quickly scaling up manufacturing capacity with new factories (Shanghai, upcoming Berlin and Texas) and new models (Model Y, upcoming Cybertruck, and planned lower-end models) 2) Large size of the auto market, favorable regulations, and a lack of a real direct competitor (thus far) in the electric vehicles (EV) and autonomous driving space 3) The Covid-19 led disruption in the auto market could also slow down mainstream automakers’ shift to EVs, giving Tesla an edge. That said, Tesla’s average selling prices could continue to trend lower, to about $48k per vehicle as Tesla produces more mass-market vehicles. This would translate to Automotive Revenue of roughly $102 billion. We also expect Tesla’s Other Revenues (which include Service and Energy) to rise to about $10 billion by 2025, for a total of about $112 billion in Revenue by 2025.

Tesla’s Margins & Profits

Combine revenue growth with the fact that Tesla’s Net Margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) are on an improving trajectory. They grew from -22% in 2015 to about -1% in 2019 and it’s likely that they will improve to about 6% in 2020, with Net Profits standing at $1.8 billion.  Tesla’s margins could possibly expand to about 17.5% by 2025 (for about $20 billion in Net Profits). How is this possible? As Tesla scales up deliveries and further automates its manufacturing process, fixed cost absorption should improve. Tesla also expects battery costs to decline by over 50% in about 3 years, and this should also help margins considerably. (Tesla Can Post Apple-Like Margins. Here’s How) Thirdly, improving self-driving capabilities should drive software sales further, helping margins. (How Do Tesla’s Software Sales Impact Its Gross Margins?) So is 11x growth in earnings possible in the next five years? Yes. This appears possible when you combine 3.7x revenue growth with the 3x growth that’s possible in Tesla’s margins.

Tesla’s Valuation

Now if earnings grow 11x, will Tesla’s P/E multiple shrink to 1/11th its current level, keeping its stock price at current levels? Probably not.  If earnings really expand 11x over the next few years, instead of the P/E shrinking from around 220x now to about 20x, a scenario where the P/E metric falls more modestly to about 50x is likely if the markets expect Tesla to continue to post above-average growth rates, with reduced risk. For context, Apple (NASDAQ:AAPL) trades at a P/E of 35x, despite averaging Revenue growth of about 5% over the last 5 years, although its margins stand at over 20%. Amazon (NASDAQ:AMZN) , on the other hand, trades at a P/E based on 2020 earnings of roughly 100x, with Revenue growth averaging 25% and Net Margins of about 4%. With a 50x multiple on a Net Income of about $20 billion in 2025, Tesla could be valued at $1 trillion.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 50% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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