About Tesla
This isn’t the first time we’ve written a stock analysis article and Elon Musk was a major topic of discussion.
While it can be somewhat challenging to keep controversial societal figures and their actions separate from objective facts and logical reasoning, that is exactly what we plan on doing.
Yes, Musk is the definition of a wild card, yes, he’s a complex being and yes, from smoking weed on Joe Rogan’s podcast to shelling out $44 billion for an entire social media platform, he’s an odd guy but a serial entrepreneur without the shadow of a doubt.
While he’s mainly known for founding one of the world’s most prominent spacecraft manufacturers SpaceX and the world’s largest (by a long shot) electric vehicle manufacturer and seller, Tesla, some might not be aware that he’s one of the key founding members of what has ultimately become PayPal.
While we’ve previously written about PayPal, Tesla (not Elon Musk alone or any of his other companies) is this article’s primary topic of discussion.
For those who don’t know, Tesla reportedly holds around 71% of the entire electric vehicle (EV) market while not one company is even close to its share of the EV pie.
This is market share to the extreme.
Aside from the vehicles being sleek and standing out wherever they are driven, the company itself has recently moved its headquarters from Palo Alto, California to none other than Austin, Texas.
Aside from the manufacturing and sale of its electric vehicles, Tesla also sells solar roofs and solar panels, competing against companies outside of the auto industry, some of which we’ve recently written about in previous stock analysis articles.
So that’s Tesla in a nutshell.
A company that has quite literally founded and changed an entire industry all while providing other supplementary yet relatively focused product lines.
Let’s jump right into the company’s core financials and all fanfare aside, try to gauge whether or not this company’s stock is worth buying and keeping in your portfolio for the rest of your life.
Tesla’s stock financials
Trading at a share price of $182 accompanied with a price-to-earnings (P/E) ratio of 56.33 and maintaining a market capitalization of well above half of a trillion ($574.05 billion, to be exact, which is a little more than the amount of Walmart’s total revenue in 2022), shares of Tesla stock appear to be overvalued on a strict price-to-earnings basis, however, we think there is a necessary exception that Musk be made here.
Did you see what we did there?
Most of the companies we’ve analyzed in the past with outlandishly high P/E ratios have been rather mature companies in mature industries, with little to no tangible nor exceptional future growth prospects.
Thus, the company’s stock is just plain overvalued.
However, Tesla is different in that when a growth company (usually a younger company with deep roots in the technology sector, at least, nowadays) has a somewhat high P/E ratio, it is a hallmark signal that it is growing quite rapidly, which Tesla is.
Therefore, a higher than normal P/E ratio in some cases can be justified given a company’s growth.
Let’s move onto some of Tesla’s other financials and attempt to gain a clearer understanding of whether or not this EV titan is still growing as quickly as it has in previous years, and subsequently if it’s worth paying a growth premium for this company’s stock.
According to the company’s balance sheet, Tesla’s management team tends to approximately $62.1 billion in total assets compared to its nearly $32 billion in total liabilities.
This company’s balance sheet is significantly stronger and more asset-heavy than we initially expected, primarily because the auto industry is an expensive one to operate in, especially when it comes to manufacturing vehicles.
One of the major pains (though there are plenty others) of auto manufacturers is commodity cost fluctuations for the parts they use and put in the vehicles they sell. No matter how “good” a company’s executive team is at managing its finances, no one organization or company is immune to the negative impacts of external variables such as higher commodity and inflationary-related costs.
All in all, Tesla’s team has done nothing short of a fantastic job at scaling this company all while staying heavy on the asset side, ensuring the company has more than enough coverage to sufficiently pay down its outstanding liabilities and other debts, even during times of economic turmoil.
This is confidence invoking.
Onto the company’s income statement, Tesla’s total revenue over the past five years has, as one might have guessed, risen dramatically each year.
Specifically, the company’s reported total revenue in 2017 stood at $11.7 billion and has since climbed (each year thereafter) to $53.8 billion in 2021, which is exactly the rate of revenue growth we were hoping to see from Tesla; sustained and strong.
Will the company’s revenue continue to climb at such a rapid pace for years to come?
We personally don’t think so, however we wouldn’t be surprised in the slightest if revenue stayed in the $40 billion-$50 billion range for the next couple of years as this company has quite the fanbase and pundit following but, of course, one must account for the deceleration in revenue many businesses (especially in the auto industry, EV or not) are about to face.
Of course, for the sake of those who already own equity in Tesla, we hope future revenue grows much faster than it has in the past.
Prepare for the worst but pray for the best.
Tesla’s stock fundamentals
Many companies, especially with a deep focus in the technology sector struggle to carve out a profit early on, as most of their time, money and other resources is reinvested back into the business and its technologies.
It’s difficult to be profitable and growing at the same time, especially early on.
However, it appears as though Tesla can be profitable while growing at a considerable rate, living the best of both worlds.
Like Elon Musk himself, this company doesn’t fit your average mold.
Specifically, the company’s trailing twelve month (TTM) net profit margin is just below 15% compared to the industry’s average of -27.64%, according to TD Ameritrade’s platform.
This is unlike any other growth-oriented company that we’ve analyzed before.
Even after considering the company’s massive increase in scale (has production facilities in Fremont, California, Shanghai, China, Austin, Texas and many other plants across the globe) and the major economic headwinds faced by the auto industry as a whole, Tesla has beat the odds and obliterated the competition from the standpoint of profitability.
What is also assuring about this company and its financial stability is its comparable TTM returns on equity, assets and investment, all of which are markedly better than the industry’s average metrics.
A consideration for Tesla shareholders
It might just be us, but we’re not the biggest fans of Elon Musk being at the helm of two major companies at the same time.
Yes, he’s a proven multitasker who probably gets two hours of sleep every night but we want executives who commit the vast majority of their time to one company and one company only; the one we’re invested in.
It’s a little unsettling to us as potential investors in Tesla’s stock that he’s now devoting much of his time to a completely new project of his, Twitter.
Pictured above is the man himself, Elon Musk
All we’re saying is, this is not a small task for Musk and we would prefer someone who was all in all of the time, not tinkering with another billion dollar company.
Should you buy Tesla stock?
While we had some initial skepticism about the company given all of the hype from the general investment community and their constant attention on the company’s CEO, this company’s core numbers are incredibly sound for such a heavily scrutinized company.
We have no doubt this company will continue to grow in the long-term and be able to trudge through the bad times that are both here and yet to come.
As previously mentioned, the growth that this company is experiencing, to us, justifies paying a premium for the stock, however we still think Tesla’s stock is going to see more downside in months to come.
Therefore, we think it would be most responsible to give the company a “hold” rating, solely due to the fact that shares in the company’s stock are likely not to have reached their bottom yet. If this company’s P/E was around 30, we’d have no issue giving it a “buy” rating given its growth. We’re just not willing to overpay in this current market environment, especially if we think the company’s stock has a longer drop ahead.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.