About: Tesla, Inc. (TSLA)
Tesla's stock has been cut in half since the company's highs of last year.
Tesla is now trading at 1.5 times sales and at about 30 times forward EPS estimates.
Tesla is also trading around critical technical support, suggesting a rebound (possibly supported by a short squeeze) is likely.
Many of the issues plaguing the company may be transitory, and Tesla's China project appears to be on point.
Ultimately, shares are likely to rebound here and trade substantially higher, especially long term.
Tesla is now trading at 1.5 times sales and at about 30 times forward EPS estimates.
Tesla is also trading around critical technical support, suggesting a rebound (possibly supported by a short squeeze) is likely.
Many of the issues plaguing the company may be transitory, and Tesla's China project appears to be on point.
Ultimately, shares are likely to rebound here and trade substantially higher, especially long term.
Tesla
(TSLA)
is now 50% below its high of around $380 late last year. Things were
looking great for Tesla at one point; demand was through the roof,
profitability was higher than anticipated, and the future looked bright.
However,
things appear much different for Tesla just 6 months after its peak.
Tesla is now facing profitability issues, demand concerns, increased
competition, as well as cash burn, and even possible liquidity issues at
this point.
While some concerns regarding Tesla
should not be underestimated, the current atmosphere surrounding the
company appears to be almost panic-like. Yet, panic is likely the last
thing you should consider if you are a shareholder right now.
Source: StockCharts.com
The
stock is now firmly trading in the “buy zone” ($180-200), I recommended
as an attractive long-term buying opportunity in this
article 1 month ago.
Despite several short-term difficulties, Tesla remains a leading, high-growth company with enormous long-term potential.
Moreover, with the recent price slide, Tesla’s valuation is starting to look far more attractive
(roughly 30 times forward estimates)
relative to other growth companies.
Ultimately,
the current slowdown in demand will likely prove to be transient in
nature, and Tesla’s profitability is likely to bounce back in the second
half of the year.
Also, the overwhelming amount of
negative press surrounding the company has caused the stock to get
severely beaten down technically, right around critical support.
Tesla
represents a compelling buying opportunity at current, deeply oversold
levels, and I expect the stock to be much higher 1-year from now (given
that general marks conditions don't deteriorate).
Tesla: Burning Cash, Again
Just
when you thought it was over, back-to-back profitable quarters in 2018.
Tesla had an atrocious Q1 in 20
19. Remarkably, the company lost
However,
Tesla was hit by various transitory factors, and profitability is
likely to recover in the second half. In Q1, many of Tesla’s Model 3s
were shipped to Europe, which likely weighed some on operating costs.
Nevertheless,
Tesla’s real problem was that the company delivered far fewer Model 3
vehicles than anticipated. This was the leading factor behind Tesla’s
lower than expected revenues and much higher than expected losses in the
quarter.
Naturally, the fear on the street now is
that this will continue, that Tesla has achieved high market penetration
in certain areas, especially in the U.S., and demand for Tesla's
essential Model 3 vehicle may die down.
High Market Saturation
The Model 3 may have temporarily highly saturated the North American market. Sales of Tesla’s Model 3s and other vehicles are down notably from the highs in 2018. Nevertheless, the Model 3 was by far the best-selling car in California revenue-wise in Q1 of this year.
Ultimately,
this current “Model 3 glut” in the U.S. is likely a normal phenomenon.
There was an extremely high initial demand for the vehicle leading up to
and into its launch. Now, many consumers who wanted a model 3 have one.
Time
is required for digestion of incredibly high inflow of Model 3s into
the U.S. market. I believe the current slide in demand is a transitory
phenomenon, and demand for the Model 3 should pick back up once the
original models work their way through the auto system.
Relatively
high demand in the U.S. should return, and combined with increasing
shipments to Europe and Asia, Tesla’s production should have no problem
satisfying demand.
Production Remains Solid
Tesla is stably producing around 6K Model 3s by now.
Even if we do not factor in continuous increases in production and
leave production constant at 6K per week, Tesla should construct 312,000
Model 3s over the next 12 months.
The median price for the Model 3 remains relatively high and was around $50K per vehicle in the last quarter according to research.
However, even if we lower the ASP to $45K per Model 3 vehicle next
year, Tesla’s Model 3 segment's revenues will be around $14 billion.
It
is likely that the company could produce at least 20% gross margin on
the vehicles (Tesla’s Model 3 gross margin was over 20% for 3 out of the last 4 quarters).
This
will give Tesla a gross profit of around $2.8 billion over the next 4
quarters. The Model 3 segment delivered roughly $10.1 billion in
revenues, and $1.88 billion in gross profit over the last 4 quarters.
This represents about a 49%
YoY rise in Model 3 segment gross profit. Tesla’s more profitable Model
S/X segment should provide substantial revenues as well over the next 12
months.
However, with increased competition hitting
the market, primarily directed at the Model X vehicle, along with some
cannibalization in the Model S segment, sales are likely to come in
light.
I’m expecting just 80K Model S/X units to be
sold over the next 12 months. There is increased competition from
Jaguar’s I-PACE, Audi’s e-tron, and other EVs that appear to be
encroaching on Tesla’s market share, possibly temporarily.
Nevertheless, Tesla automobile’s performance, technology, and other competitive advantages should enable the company to sustain its market share successfully long term.
Moreover,
many consumers may begin to choose Tesla vehicles as increased
competition will likely attract an enormous amount of interest in the
100% performance EV sector. This is still a relatively small segment of
the giant auto industry, but it will likely become huge in the future.
With
an average price tag of around $100K for a Model S/X vehicle, Tesla
should deliver roughly $8 billion in revenues from this segment (my
estimates). If we use a typical 27% gross profit margin in this segment,
Tesla should deliver about $2.16 billion in gross profit over the next
12 months.
Tesla’s Profitability Potential
Tesla’s
secondary businesses essentially cancel each other out profitability
wise, as services continuously bleeds cash, while leasing and energy
generation and storage continue to be profitable.
With
an estimated gross profit of $2.16 billion from Model S/X segment and
an estimated gross profit of $2.8 billion from the Model 3 segment,
Tesla should deliver around $4.96 billion in gross profit over the next
12 months.
This exceeds the company’s operating
costs over the past year, which were $4.285 billion. Additionally,
operating costs were abnormally high due to Model 3 ramp up and other
transitory issues last year.
Operating costs are also in a downward trend, and the company is continuously implementing methods to lower costs, a trend that is likely to continue going forward.
Elon
Musk is likely the type of person that can micromanage costs extremely
effectively if it is considered a priority for him. Right now, it
appears to be the number one priority for the company.
Therefore,
even with relatively low, somewhat even stagnant production
projections, Tesla could deliver around $5 billion in gross profit over
the next year.
Simultaneously, the company may be
looking at lower operating costs YoY as well. If the current trend of
lower costs and cost cutting continues, Tesla could conceivably lower
operating costs to roughly $4 billion (modest 6.6% YoY decrease).
$5
billion in gross profits and $4 billion in operating costs would
provide Tesla with a very healthy $1 billion operating income. However,
interest expenses and other non-operating costs would likely lower
Tesla’s net income to about $300-500 million over the next 4 quarters.
This
would equate to roughly $1.69-2.80 in EPS over the next 12 months,
translating to a forward P/E ratio of 68-112. This certainly is not
cheap, but please keep in mind, this is with relatively conservative
projections, especially in the Model 3 segment (essentially presuming no
production/demand growth).
Tesla Could be Huge
in
China and
in
Asia in General
Also,
it is important to mention that Tesla’s production, sales, and earnings
should increase once the Chinese Gigafactory is functional later this
year/2020.
Despite the trade dispute with China,
Tesla should still build its factory in Shanghai, likely on favorable
terms, and as scheduled. In fact, the company is showing enormous progress in the production process already.
Realistically, Tesla could
very well surprise investors to the upside, especially in the second
half of the year. I used relatively modest estimates in this article,
but I believe Tesla could surprise to the upside profitability wise,
possibly delivering $5 or more in EPS over the next 12 months. This kind
of profitability would put Tesla at a 38 forward P/E multiple.
(Current consensus estimates for 2020 are for $6, implying a forward P/E ratio of about 30).
With
an expected revenue growth rate of 23.5% next year, and with the
factory in China well on its way to being built, Tesla looks like a
compelling buy at 30 or at even 38 times forward earnings.
Additionally,
it is difficult to value a company in its transitionary phase of
becoming a profitable enterprise. Traditionally, such growth companies
are valued on a price to sales basis. Tesla trades at just 1.5 times
sales, relative to growth companies like Amazon (AMZN) which trades at 3.72 times sales.
The Chinese Wild Card
China
remains an important wild card for Tesla, but I think most concerns are
overblown. Everything appears to be going well with Tesla’s Gigafactory
in China, and I expect things to progress per schedule.
It
is in both parties’ (Tesla/Chinese government) best interests that
Tesla has a strong foothold in China. Furthermore, even if Chinese
consumers have to pay higher prices for Tesla vehicles due to tariffs
(worst case scenario), demand should remain strong
as Tesla is becoming increasingly popular in China. This is especially
advantageous as China remains by far the biggest EV market in the world.
Technical View

It appears that Tesla is attempting to find a bottom at this crucial multi-year level of support ($180-200).
The Bottom Line
While
the first half of this year will likely be painful for Tesla, strong
international demand should enable the company to recover sales and
profitability in the second half.
The U.S. market
may be highly saturated with Tesla vehicles, but this should prove to be
a temporary phenomenon. Moreover, Tesla is increasingly expanding
overseas, is gaining popularity, and is increasing market share outside
the U.S.
Some competition has arrived and is
encroaching primarily on some of Tesla’s Model S/X market share. This
will also likely prove transient as Tesla remains the leading company in
100% performance EVs, and competition should bring more overall
interest to the 100% EV space.
Unless a complete
debacle occurs, Tesla should deliver at least $5 billion in gross profit
and $300-500 million in net income over the next 12 months.
Under
more favorable conditions, Tesla’s income could roughly double, in
which case the stock could be trading at around 30-40 times forward
earnings and at just 1.5 times sales.
Tesla’s
project in China shows no signs of slowing down, and a foothold in Asia
would give Tesla a tremendous advantage. It would also enable the
company to significantly increase revenues and possibly profits in 2020
and beyond.
I’m bullish on the stock at these
levels, given that a significant market downturn does not occur. If a
recession, coupled with a bear market materialized, Tesla and, stocks in
general, could go a lot lower.
My best-case
scenario 1-year price target is $400-450, mid-case $300-350, and my
lower-end, worst-case scenario, bear market price target on Tesla is
$80-100.
Disclosure:
I am/we are long TSLA. I
wrote this article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I have no
business relationship with any company whose stock is mentioned in this
article.
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