Since it went public in 2010, Tesla Motors Inc.’s (TSLA’s) stock price has always been controversial, but over the past fortnight, the issue has been debated with increasing intensity. After trading hours closed on October 20th, the company released its much-anticipated third-quarter earnings report. With earnings of 1.86 USD per share, up an impressive 146% from last year, the Elon Musk headed automobile manufacturer significantly surpassed most expectations. Moreover, last Monday saw Hertz, a vehicle rental company, put in a record-breaking order for 100,000 Model 3s, in a deal that, according to Forbes, will gross Tesla over 4 billion USD. The agreement propelled Tesla’s market value upwards, breaking the trillion-dollar mark and becoming the first automobile manufacturer ever to do so. Despite this, the deeper analysis seems to provide a reason to doubt that Tesla’s current market cap provides a realistic valuation of the company; J.P. Morgan’s Ryan Brinkman defended the investment bank’s ‘underweight’ rating, claiming that, whilst the company’s fundamentals ‘continue to improve’, its ‘present valuation…demands even more’. Perhaps investors should be cautious about jumping on the Tesla trend and ensure that they have a long-term growth-orientated motivation for doing so.
Objectively, Tesla’s third-quarter earnings were impressive. Set against the inflationary backdrop and unprecedented supply chain issues plaguing the industry, they were almost too good to be true. Many household names, Ford, Volkswagen, and Daimler AG are engaged in a losing battle to contain the fallout from supply chain disruption. Tesla, on the other hand, seems to have elegantly sidestepped these issues. Its new manufacturing facilities, or ‘giga-factories’, have allowed the automaker to capture more of the supply chain upon which it is dependent. This undoubtedly contributed towards its record delivery statistics over the previous three months. According to Statista, delivery numbers for Tesla during Q1-Q3 in 2021 were an impressive 97% increase over the same period in 2020. The company has been rewarded for their prudence, netting a considerable 1.62 billion USD in the third quarter, over five times more than it recorded this time last year. Historically, the bear argument against Tesla was centred around a lack of actual profit. Considering recent performance, the company will hope to have put this thesis squarely in the rear-view mirror.
The Hertz agreement and recent earnings call have, between them, sent the price of Tesla stock rocketing to unprecedented heights. Investors saw gains of over 20% as the company became the sixth to achieve a market cap of over 1 trillion USD. Perhaps more worryingly, and despite the increase in its net income, the automaker also claimed the record for the company with the lowest revenues when crossing into the trillion-dollar territory. Tesla is now worth more than Ford, General Motors, Volkswagen, Toyota, BMW, Honda, and Daimler AG put together but falls shockingly short of their combined revenues, net incomes, and free cash flows (FCFs). Upon these metrics, for Tesla to be worth its valuation in comparison to the aggregate of its aforementioned rivals, it would need to bolster revenues (which currently stand at 46.85 billion USD in the trailing twelve months) by over 1 trillion USD and see increases of almost 3000% in net income and FCF.
Coupled with a staggeringly high price to equity (P/E) ratio, this disparity has led many analysts to conclude that Tesla stock is significantly overvalued, with the lowest price predictions, namely those of J.P Morgan analyst Ryan Brinkman, coming in at about 220 USD per share (upon writing, TSLA is currently trading at 1114 USD). However, it should be stressed that, whilst Tesla stock has amassed somewhat of a cultish following, the original argument in favour of the high-flying automobile giant was always predicated upon its potential to become the cornerstone of an enormous market. A market that does not currently exist. Given this, the potential investor must weigh up the future of the electric vehicle (EV) industry: the key players, policy commitments and changing customer attitudes. Although the US and UK both have official mandates for the future growth of the EV market, such targets have been set, and fallen through, more than once in the past. It is also not clear that the public demand for EVs is such that a goal of this nature could feasibly be achieved, with a recent Pew Research survey suggesting that only 39% of US consumers would consider an EV when they next change vehicle.
As it stands, EVs contribute just 2% towards automobile sales, and with growing concerns about the feasibility of an all-electric automobile world, the future of the market is far from guaranteed. This quarter’s earnings call should be taken as evidence that Tesla is on the right track and can stand firm on its own two feet. Nevertheless, investors should be wary of jumping on the Tesla trend and ensure that, if they are to do so, they approach the stock with the right motivations and mindset – a Tesla pullback in the coming months would not be a big surprise, but, arguably, neither would a Tesla-dominated EV industry in the future.
By Alex Mortimer
Sector Head: Robert Armstrong-Jones