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Tesla Stock Deep Dive: Price target at $400 on China headwinds, margin compression, lower deliveries

Tesla Stock Deep Dive: Price target at $400 on China headwinds, margin compression, lower deliveries
  • Tesla trades on an incredibly optimistic valuation despite recent share price fall.
  • Tesla is likely to suffer from rising input costs, slowing demand and higher financing costs.
  • Risks to our bearish case are inflation falling quicker than expected and consumer demand holding up, especially in China.

Tesla (TSLA) has been a stellar performer for investors over the past number of years, but recent events both from a macroeconomic perspective and company-specific viewpoint are leading investors to question the investment thesis and relative valuation of Tesla. In this deep dive view, we propose a discounted valuation of Tesla as well as a relative comparison and skew our model to include varying scenarios. Our base case assumes a valuation of close to $400 per share, meaning at the current level Tesla is still considerably overvalued. 

Update: We have ammended the price targtet from $400 to $133 to account for the 3 for 1 share split on August 25.

Tesla history and background

Tesla is headquartered in Austin, Texas, and is involved in manufacturing and distributing electric vehicles and energy storage systems. Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning in California. Elon Musk did not join the company until 2004 and became chairman in 2008. Tesla launched its first car, the Roadster, in 2008, which was met with a positive reaction, but the technology and charging time was a significant drawback. Tesla launched its IPO in June 2010 with the stock price debuting at $17 per share, raising $226 million for the company. Tesla did not make its first profit until 2013.

Since then Tesla has expanded its business into other so-called green energy initiatives, but the electric vehicle business remains its core. Tesla produces two main models of electric vehicles, the Model S and the Model 3. The Roadster was discontinued in 2012.  2020 saw a massive share price appreciation in Tesla (TSLA) stock as it soared from $400 to nearly $1,000.

Tesla share price, 2020 to current

Tesla key info

Market cap $700 billion
Enterprise value (EV) $1.237 trillion
EV/EBITDA 126
Free float 857 million shares
IPO date 9 June 2010
52-week high $1,243.9
52-week low $571.22
Short Interest 2.3%

Read more on electric vehicle (EV) stock research

Tesla valuation ratio versus peers

We have detailed the standard auto company comparisons to include legacy automakers as well as noted Chinese EV makers NIO and BYD. We also include a comparison versus tech companies Apple and Google as Tesla is partly a tech company and deserves a higher multiple than traditional automakers. We include S&P 500 and Nasdaq P/E averages.

  Tesla GM  Ford VW BYD NIO Google Apple S&P 500 Nasdaq
Market cap $700b $52b $52b $86b $118b $28b $1.5t $2.3t    
Gross margin 27% 13% 12% 19% 11% 19% 57% 43%    
Free cash flow $7b -$3.7b $4b $20b $7.8b $69b $106b    
P/E 90 6 4 5 203 20 22 20 25
EV/EBITDA 126 8 16 6.5 30 20 21    
Price/Book 23 1 1 0.7 7 4 6 36    
Price/Sales 14 0.4 0.3 0.4 3 5 6 6    

 

While Tesla looks obviously overvalued versus legacy automakers, it offers higher profitability and margins in the sector. Even compared with big tech companies, it remains highly valued versus Apple and Google. 

Macroeconomic background and market cycle

Tesla is a high-growth stock and operates as mentioned at an extremely high valuation. Stock markets are forward-looking, and high valuations such as price/earnings (P/E) are not unusual for high-growth companies. However, the macroeconomic backdrop needs to be accommodative to such valuations and growth rates. The US has witnessed increasingly loose fiscal and monetary policies since the Global Financial Crisis (GFC) in 2008. This accelerated with the covid pandemic in 2020 and led to equity valuations and other high-risk assets reaching record highs. 

image 637889916415354052

Chart Fed balance sheet vs Nasdaq since 2008. 

However global central banks have now begun tightening monetary policy in the face of rising inflation. This has obvious implications for risk assets, and 2022 has seen a marked reduction in the price of such assets ranging from crypto to NFTs to high growth equities. This situation is not likely to change in the foreseeable future. Inflation will take time to return to reasonably acceptable levels, and central banks have huge balance sheets that need to be reduced gradually. 

The US equity market peaked in January and since then has fallen by just under 20% for the benchmark S&P 500, while the high growth Nasdaq is down 27% in 2022. By traditional metrics, the S&P 500 will soon enter a bear market, while the Nasdaq is well-established in a bear phase. The average bear market results in a peak to trough decline of 40% and lasts approximately 300 days. Bear markets that are not accompanied by a US economic recession are notably shorter with drawdowns closer to 25%. By either metric though, there is likely more pain to come for equities for the remainder of the year. 

TSLA%20(1) 637891492321522346

Tesla share price versus S&P 500 and Nasdaq. Percentage performance in 2022.

Tesla recent news and earnings

The Tesla share price has been under continuous pressure for the past three months. This has been due to macroeconomic factors as mentioned above and potential headwinds from Tesla’s Giga Shanghai factory being shuttered due to covid lockdowns in the city. Recent car delivery data from the China Car Passenger Association showed Tesla sales dropping 98% MoM. Tesla also did not export any China-made vehicles in April. However, the factory is now operational once again, and Tesla has relaunched exports from the plant. China is also embarking on a loosening of monetary policy in the wake of slowing economic growth and will also look at extending its EV credits. China is the world’s largest EV market.

Read more equity research

Tesla last reported earnings on April 20 and posted a significant beat versus analyst estimates. Revenue was $18.75 billion, 5% ahead of average estimates, while earnings per share (EPS) were $3.22 versus the $2.26 estimate. This marked the fourth straight quarter that Tesla has beaten estimates on the top and bottom lines. Tesla will next report earnings on July 25, 2022.

The recent “will-he-won’t-he” Twitter takeover saga has been a serious headwind to Tesla. Initial reports and filings suggested up to $12.5 billion in financing would necessitate Tesla CEO Elon Musk pledging up to $60 billion of Tesla stock as collateral. Subsequent backing from investors reduced this loan to $6.25 billion, but Tesla shareholders were still more acutely aware than ever that Elon Musk has reportedly pledged up to 85 million Tesla shares over various terms and time horizons. Pledging additional Tesla shares as collateral increases the risk of shares being called back in the event of a significant Tesla share price decline.

Tesla valuation and peer analysis

There are two main valuation methods in corporate finance to find a fair value for any stock. Those are discounted cash flow (DCF) analysis and relative valuation. DCF aims to predict future cash flows and discount them back to a present value. Dividing this present value by the number of shares will then give a target share price. The second method is to compare relative valuations across industries and sectors. So using traditional metrics like price/earnings (P/E), price/sales and enterprise value/earnings before interest tax depreciation and amortization (EV/EBITDA). We will use both methods to come up with our target price and fair value for Tesla. All data is based on Refinitive data detailed at the end of the article for historical cash flows and predicted future cash flows out to 2024.

  Tesla free cash flows            
  2019 2020 2021 2022 2023 est 2024 est terminal
               
EBITDA 2,983 5,817 11,621 20,487 27,603 34,811  
EBIT 829 3,728 8,644 16,673 24,141 31,301  
Tax rate 47% 12% 8% 15% 19% 21%  
               
EBIT (1-t) 1,581 5,119 10,691 17,414 22,358 27,501 0
D&A 2,154 2,322 2,197 4,414 5,757 4,704  
NWC -1,436 -12,469 -7,395 -7,595 -3,433 -2,744 0
Capital expenditures 1,432 3,232 6,514 7,036 7,247 7,692  
Unlevered free cash flows (UFCF) -569 12,034 9,375 13,559 12,787 17,849  
Free cash flow forecasts 968 2711 3483 9763 13964 15332  
Discount rate (r)   10% 10% 10% 10% 10% 10%
PV of UFCFs   10,831 8,438 12,203 11,509 16,064
               
Stage 1: Sum of present values 59,044          
               
Growth in perpuatiy valuation     Using Forecast FCF        
growth rate   7%   7%      
2024 UFCF   19,098   16,405      
termival value in 2024   636,603   546,841      
Present Value of Terminal Value   395,281   339,545      
               
Enterprise value 454,324 339,545      
               
current net debt   20487   20487      
               
shares outstanding   856.8   856.8      
               
equity value $506 $372      
EBITDA Multiple approach              
ebitda multiple   20          
terminal value in 2024   696,220          
PV of term value   432,298          
               
ent value   491,342          
net debt   20,487          
shares outstanding   857          
equity value $550          

Source: FXStreet calculations

For those not fully familiar with the discounted cash flow approach (DCF), a brief explanation. As mentioned we use historical and predicted future cash flows to create a trend of growth. At some stage though, we have to assume a constant growth rate once the company (like any) moves from its hyper-growth phase into a steady stable growth rate into perpetuity. Traditionally, this growth rate would be modest and in line with inflation or the 30-year bond for example. Given Tesla’s high growth rate and the growth rate of the entire EV industry, we have used a much higher 7% rate of growth than the industry standard of 4% or 5%. This is then used to calculate the terminal value. This is essentially the lump sum future value beyond the forecast period. We then return the sum of future and terminal values to the present value.

Also read: GGPI stock sets June 22 to approve Polestar merger

However, using the growth into perpetuity approach means we have to essentially guesstimate the long-run growth rate. Another approach is to use the current EV/EBITDA multiple or the EV/EBITDA of the sector or peer group. We then assume this will be relatively constant for the last year of the forecast. For this, we have compared Tesla to the tech sector rather than the auto sector. Tesla straddles both tech and auto, but for now it is more innovative as is the EV space in general, so we assign the higher EV/EBITDA tech multiple. 

As can be seen above, using the EV/EBITDA multiple approach gives us a fair value of $550 per share while using the growth in perpetuity gives us a fair value of $506 per share.

Tesla relative valuation model

The more widespread valuation model used to compare stocks across sectors and industries is the relative valuation using traditional valuation ratios. For example, we can compare across different sectors based on price/earnings, price/sales or EV/EBITDA. This allows companies within the same sector to be compared. However, different sectors often will operate on vastly different multiples. This is due to the growth of the sector, the growth in average profitability of the sector and the maturity of the sector. It also regards the maturity of cash flows of companies within the sector. Obviously, the legacy auto sector is well-established, and companies trade at much lower multiples to the tech sector. We can see this below from the comparison table. The auto industry is labor intensive and not as flexible as tech, so hence the lower multiple for the sector overall.

Tesla Relative Valuation        
  Price/Earnings (P/E) Price/Sales (P/S) EV/EBITDA  
Tesla 90 14 126  
GM 6 0.4 8  
Ford 4 0.3 16  
BYD 203 3 30  
Google 20 6 20  
Apple 22 6 21  
S&P 500 Avg 20      
Nasdaq Avg 25      
         
EV – enterprise value        
EBITDA – earnings before interest tax depreciation and amortization        

Source: Refinitiv and FXStreet calculations

We have also included the average ratios for the S&P 500 and Nasdaq as a whole. Using these multiples allows us to predict fair values for Tesla which we detail below.

Tesla Share Price at above P/E multiples                
    P/E 90 Tesla current P/E of 5 GM Ford P/E of 25 Nasdag Avg P/E of 21 Apple
Tesla share price using                
TTM earnings $6.78 eps   $610 $33.9   $169.5     $142.38
Tesla share price using                
NTM earnings $12.31 eps   $1,107.9 $61.55   $307.75     $258.51
                 
TTM – trailing twelve months                
NTM – next twelve months                

Source: FXStreet calculations

Taking our various approaches into consideration results in four fair value assumptions for Tesla’s share price.

Tesla Share Price Valuations            
Discounted Free Cash Flow Perp   $506 using 7% growth rate-high by historical standards      
Discounted Free Cash Flow EV/EBITDA   $550 using Apple, Google EV/EBITDA ratios      
Price/Earnings v’s Apple   $259        
Price/Earnings v’s Nasdaq   $308        

Source: FXStreet calculations

We now take our fundamental share price valuation and combine it with the technical overview for Tesla below.

Tesla technical analysis

We can clearly see the current strong downtrend dominating the Tesla stock price. A series of lower lows and lower highs. The key was breaking $975. Tesla found some initial support at the $700 area and has finally broken below to trade perfectly down to the next support at $620. This should see some short-term stabilization and lead to a bear market rally in our view. A move back up to $800 would not be unexpected in the next number of weeks. However, the long-term picture remains bearish as we outline in the weekly chart analysis.

image 637891518461865499

Tesla chart, daily

A very clear series leading to a long-term bearish narrative. We now have Tesla trading below all major moving averages with associated Moving Average Convergence Divergence (MACD) crossover. A volume gap beneath $620 could lead to a sudden capitulation to the bear target of $434. This is the long consolidation area from August 2020 until November 2020. That technical target is in line with the DCF and relative valuation price targets outlined above and gives us more comfort in our price target.

image 637891517717807279

Tesla chart, weekly

Tesla price target and recommendation

Using all the valuations methods detailed above, we place a $400 price target on Tesla and a sell rating. All our models were based on average forecasts provided by Refinitiv and based on analyst and company guidance. We believe current forecasts are not yet fully incorporating the margin compression and delivery slowdown from the GIGA factory Shanghai slowdown. Media reports estimate that production is moving quickly back up to speed, but we still feel a reduction in year-end deliveries in the region of 10% is appropriate. Shanghai is Tesla’s highest margin output, so in line with a reduction in deliveries will be a margin compression for FY2022. This is why we err to the lower side of our valuation forecasts.

Upside risks to our assumptions

  • Shanghai production moves back to 100% quicker than expected.
  • Inflation remains transitory.
  • US, China and the global economy do not move into a recession by 2023.
  • Fed reverses monetary tightening.

Downside risks to our assumptions

  • Shanghai margins and production take a worse than expected hit.
  • S&P 500 and Nasdaq remain in bear territory. An average bear market would see another 20% fall in the S&P 500.
  • Consumer spending especially at the high end falls in the face of lasting inflation.
  • Fed over tightens and raises rates too high.

Tesla reported earnings and forecast tables below, the foundation for all our DCF models. Data taken from Refinitiv (Reuters).

Next Earning Report                
Tesla Income Statement and Forecast                
        HISTORICAL (ACTUALS)   Forecast    
        FY 2022        
  FY Dec-19 FY Dec-20 FY Dec-21 Q1 Mar-22 FY Dec-22 FY Dec-23 FY Dec-24
INCOME STATEMENT                
REVENUE 24578.000 31536.000 53823.000 18756.000   86517.257 116096.639 137472.295
    Guidance T T T   T T
        AUTOMOTIVE 20821.000 27236.000 47232.000 16681.000   77201.309 101842.827 111262.013
        ENERGY GENERATION AND STORAGE 1531.000 1994.000 2789.000 616.000   3479.717 4705.675 6214.500
        SERVICES AND OTHER 2226.000 2306.000 3802.000 1279.000   5168.675 6396.950 7540.244
                 
COST OF GOODS SOLD 20509.000 24625.000 39796.000 12888.000   61886.470 84254.913 101573.627
GROSS INCOME 4069.000 6911.000 14027.000 5460.000   23608.863 32531.203 37397.669
GROSS PROFIT MARGIN 16.560% 21.910% 26.060%   27.544% 27.857% 27.662%
    Guidance T T T   T
                 
SG&A EXPENSE 2646.000 2038.000 3265.000 848.000   5191.099 6837.573 7470.553
TOTAL COMPENSATION EXPENSE 482.000 1107.000 1252.000  
R&D EXPENSE 1058.000 1145.000 2145.000 722.000   3748.985 4830.152 4705.084
STOCK BASED COMPENSATION 898.000 1734.000 2121.000 418.000   1861.361 2217.006 2075.699
OPERATING EXPENSE 4138.000 4636.000 5383.000 1857.000   8841.796 11297.220 12775.216
    Guidance T T T   T
                 
EBITDA 2983.000 5817.000 11621.000 5023.000   20487.899 27603.486 34811.174
EBITDA PER SHARE 3.248 5.370 10.289   18.781 24.514 28.915
DEPRECIATION 2154.000 2322.000 2146.000 551.000   4162.220 5504.998 4452.497
EBITA 80.000 3728.000 8695.000   16244.000 22463.500 26108.500
AMORTIZATION 0.000 0.000 51.000   252.000 252.000 252.000
DEPRECIATION & AMORTIZATION 2154.000 2322.000 2911.000 880.000   3857.388 4627.599 5220.943
                 
EBIT 829.000 3728.000 8644.000 4021.000   16673.733 24141.642 31301.620
OPERATING PROFIT   16957.000 25984.000 47935.000
    Guidance T T T  
INTEREST EXPENSE 685.000 748.000 371.000 61.000   212.989 237.056 235.980
                 
PRE-TAX PROFIT 233.000 2751.000 8464.000 4044.000   16146.806 22428.426 27423.868
TAX PROVISION 110.000 327.000 685.000 346.000   2163.054 3510.413 4271.731
TAX RATE 47.210% 11.890% 8.090% 8.560%   15.240% 18.993% 21.250%
                 
NET INCOME 35.772 2424.000 7654.000 3731.000   14113.677 18601.287 20827.189
    Guidance   T
NUMBER OF SHARES OUTSTANDING 885.000 1083.000 1129.000 1157.000   1152.185 1164.504 1169.261
                 
EARNINGS PER SHARE 0.040 2.240 6.780 3.220   12.311 15.908 17.776
EBITDA REPORTED 2234.000 4316.000 9407.000 4483.000   19173.106 24901.436 26805.520
PRE-TAX PROFIT REPORTED -665.000 1154.000 6343.000 3626.000   14241.952 20295.294 23203.282
NET INCOME REPORTED -862.000 721.000 5519.000 3318.000   12798.610 17844.671 19463.775
EARNINGS PER SHARE REPORTED -0.984 0.640 4.900 2.860   10.553 14.334 17.236
DIVIDEND PER SHARE 0.000 0.000 0.000 0.000   0.000 0.000 0.000
BALANCE SHEET                
CASH AND CASH EQUIVALENTS 6268.000 19384.000 17576.000 17505.000   24697.253 40128.093 57752.456
INVENTORY 3552.000 4101.000 5757.000 6691.000   9160.583 10421.152 10809.352
CURRENT ASSETS 12103.000 26717.000 27100.000 29050.000   39321.909 60235.500 83072.375
TOTAL ASSETS 34309.000 52148.000 62131.000 66038.000   79211.923 103397.083 132874.400
CURRENT LIABILITIES 10667.000 14248.000 19705.000 21455.000   25004.800 30519.111 33694.857
CURRENT DEFERRED REVENUE 1163.000 1458.000 1447.000 1594.000   1594.000 1713.500 1851.000
LONG-TERM DEFERRED REVENUE 1207.000 1284.000 2052.000 2185.000   2185.000 2513.000 2890.000
TOTAL DEBT 13419.000 11688.000 6834.000 4812.000   5838.750 5082.500 5157.500
NET DEBT 7151.000 -7645.000 -10873.000 -13201.000   -20487.387 -33816.420 -49844.311
SHAREHOLDERS EQUITY 6618.000 22225.000 30189.000 34085.000   43328.504 60860.194 80545.345
GOODWILL 198.000 207.000 200.000 200.000   329.000 329.000 323.500
NET ASSET VALUE 7467.000 23075.000 31015.000 35406.000   42259.167 60200.000 82033.556
BOOK VALUE PER SHARE 7.343 23.447 30.061 32.980   40.301 56.715 79.534
TANGIBLE BOOK VALUE PER SHARE 6.718 22.898 29.606 32.541   39.059 53.734 61.070
ENTERPRISE VALUE 114963.000 1082174.740   704581.641 695803.014 806899.911
TANGIBLE BOOK VALUE 6081.000 21705.000 29732.000 33631.000   44975.060 59441.638 76801.228
CASH FLOW STATEMENT                
NET WORKING CAPITAL 1436.000 12469.000 7395.000 7595.000  
CASH FLOW FROM OPERATIONS 2405.000 5943.000 11497.000 3995.000   16537.644 21915.532 24366.709
CAPITAL EXPENDITURES 1432.000 3232.000 6514.000 1767.000   7036.644 7247.336 7692.970
    Guidance T T T  
CASH FLOW FROM INVESTING -1436.000 -3132.000 -7868.000 -2167.000   -7976.375 -8588.000 -9994.571
FREE CASH FLOW 968.000 2711.000 3483.000 2228.000   9763.691 13964.199 15332.149
FREE CASH FLOW PER SHARE 1.100 2.500 4.410 1.930   9.750 12.680 15.220
TOTAL DIVIDENDS 0.000 0.000  
CASH FLOW FROM FINANCING 1529.000 9973.000 -5203.000 -1914.000   -1761.000 -1264.750 -1698.250
CASH FLOW PER SHARE 2.718 5.490 10.180 3.450   15.985 18.418 22.445
VALUATION METRICS                
RETURN ON ASSETS 0.110% 5.610% 13.400%   21.986% 23.940% 16.700%
RETURN ON EQUITY 0.570% 16.810% 29.210% 46.440%   33.917% 32.069% 27.881%
RETURN ON CAPITAL EMPLOYED 0.500% 9.840% 18.760%   26.700% 26.800% 24.750%
RETURN ON INVESTED CAPITAL 4.920% 22.040% 41.200% 16.550%   50.600% 68.100% 78.300%
PRICE/SALES RATIO   8.370% 6.490% 5.410%
INDUSTRY KEY METRICS                
                 

Source: Refinitiv (Reuters)

The author is short Tesla and Twitter.


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Written by Judith Nistro