Tesla’s (TSLA) second quarter earnings verify my view that the inventory is likely one of the most overvalued shares out there.
Tesla’s inventory has been rising this yr amid a sudden shift in total market sentiment, with many traders now pricing in a soft-landing state of affairs after a brutal previous yr of Federal Reserve fee hikes. However the shift in market sentiment doesn’t change the truth that Tesla’s inventory fundamentals are fully disconnected from actuality. Tesla is a very overvalued inventory that I believe is value nearer to $26 per share as a substitute of its present value of about $290 per share.
Whereas Tesla is worthwhile, its earnings are nowhere close to the degrees wanted to justify its present valuation. I acknowledge that Tesla’s enterprise generates a powerful return on invested capital (ROIC), which is a key measure of profitability, particularly for an automaker. Nonetheless, that ROIC is already declining within the trailing-twelve-month (TTM) interval.
Utilizing my reverse discounted money move (DCF) mannequin, I discover that for the inventory to have any upside at present ranges, Tesla should enhance its ROIC to ranges not achieved by even probably the most worthwhile companies on the planet. See appendix for checklist of firms with a 3-yr common ROIC increased than the implied ROIC in Tesla’s present inventory value. Determine 1 reveals Tesla’s historic ROIC together with the long run ROIC implied by its present inventory value. I present the assumptions behind this DCF state of affairs later on this report.
Determine 1: Tesla’s Historic and Implied NOPAT: DCF Valuation Situations
Tesla’s newest earnings proceed to indicate that it isn’t proof against aggressive challenges and can possible see decrease profitability sooner or later. However, its valuation implies the other. Any investor with fiduciary duties ought to pay attention to the rising disconnect between Tesla’s present fundamentals and the long run fundamentals implied by its inventory value. Even in an optimistic future money move state of affairs, shares might commerce as little as $26/share. All the main points are under.
Provide Constrained Argument Is Gone: Bulls have lengthy argued that demand for Tesla autos has all the time exceeded the availability of autos. Nonetheless, Tesla’s a number of value cuts in 2023, together with its lackluster manufacturing ranges by the primary half of 2023, increase questions on simply how a lot demand there may be for Tesla autos, particularly amid competitors from rivals Ford (F), Basic Motors (GM) and nearly each different automaker. 2Q23 marks Tesla’s fifth consecutive quarter by which autos produced had been larger than autos delivered. Tesla is now not promoting each car it could possibly make. Ought to demand for EVs sluggish, Tesla might discover itself with increased than wished stock ranges, which might result in additional value cuts and extra stress on already falling margins.
Continued Money Burn: Regardless of Tesla’s prime line development, it continues to burn large quantities of money. Over the previous 5 years, Tesla has burned a cumulative $4.2 billion in free money move (FCF), together with $3.6 billion over the trailing-twelve months (TTM) alone. Tesla has generated detrimental FCF in all however one yr (2019) of its existence as a public firm.
Margin Decline: Tesla’s “GAAP gross margin” was 18.2% in 2Q23, down from 19.3% in 1Q23 and 25.0% in 2Q22. 2Q23’s GAAP gross margin was under expectations of 18.7% and stays at its lowest stage since 4Q20.
Tesla’s working margin can also be shifting the fallacious route because it scales up. After promoting 211 thousand extra autos in 2Q23 in comparison with 2Q22, Tesla’s reported working margin fell 493 foundation factors YoY in 2Q23. Tesla famous in its press launch that decreased common promoting costs had been one of many gadgets that impacted margins within the quarter. I’d anticipate Tesla’s margins to fall additional as competitors limits pricing energy throughout the trade.
Market Share Is Not Sufficient
Whereas Tesla has quickly ramped up car manufacturing and deliveries, its market share should improve nearly exponentially to justify the expectations baked into its inventory value. Nonetheless, because it stands, Tesla holds a meager share of the worldwide auto trade, and its share of the EV market ranks behind incumbents throughout Europe and China.
In Europe, based mostly on gross sales from Might 2023, Tesla holds a 12% share of the EV market, a lot decrease than VW Group (20%) and Stellantis (14%).
In China, additionally based mostly on gross sales from Might 2023, Tesla holds 9% of the EV market in comparison with a staggering 38% share for prime competitor BYD.
Different Enterprise Segments Aren’t Materials
Bulls have lengthy argued that Tesla isn’t simply an automaker, however slightly a know-how firm with a number of verticals akin to insurance coverage, solar energy, housing, and, sure, robots. I’ve lengthy refuted these bull goals. Whatever the guarantees of growing a number of enterprise traces, Tesla’s enterprise stays concentrated in its auto section. Auto income accounted for 86% of Tesla’s TTM income as of 2Q23.
What Does It Imply?
Tesla can now not get pleasure from its first mover benefit as many different main automakers are producing electrical autos. These rivals have extra expertise in auto manufacturing and extra sources and money move than Tesla to spend money on the electrical car market.
Tesla is vulnerable to dropping market share to its rivals within the electrical car house and its inventory value is at present not reflecting that, which is a significant threat for traders.
Reverse DCF Math: Quantifying Expectations In TSLA
Under, I take advantage of my reverse DCF mannequin to offer clear, mathematical proof that Tesla’s valuation is simply too excessive given the expectations baked into its present inventory value. I will even present the draw back threat ought to Tesla develop at extra cheap ranges. Particularly, I analyze:
- Implied ROIC
- Implied NOPAT
- Implied autos offered and attendant market share
- Implied autos offered and attendant market share assuming Tesla’s “non-auto companies” account for 40% of complete income
Tesla’s Valuation Implies 129% ROIC
I begin with quantifying the expectations in Tesla’s present value, and what they indicate about Tesla’s ROIC. In an effort to justify its present value of $290/share, my mannequin reveals Tesla would want to:
- instantly obtain a 13% NOPAT margin (2x Toyota’s TTM margin, in comparison with Tesla’s TTM margin of 12%)
- develop income by 36% compounded yearly and
- develop invested capital at only a 15% CAGR (vs. 50% CAGR from 2012–TTM) to increase capability over the subsequent decade.
On this state of affairs, Tesla would generate $1.7 trillion in income in 2032, which is 1.7x the mixed revenues of Toyota, Stellantis (STLA), Ford (F), Basic Motors (GM), Honda Motor Co. (HMC), and Nissan (NSANY) over the TTM.
This state of affairs additionally implies that Tesla improves its ROIC to 129% in 2032, up from 25% over the TTM. For reference, no different main automaker earns an ROIC larger than 20%, and solely two firms within the S&P, Moderna (MRNA) and Fortinet (FTNT), earn an ROIC above 129% over the TTM.
If I as a substitute assume Tesla’s:
- NOPAT margin stays 11.5% (equal to TTM) from 2023 by 2032,
- income grows at consensus charges in 2023 (27%), 2024 (26%), and 2025 (23%),
- income grows 23% a yr (continuation of 2025 estimate) from 2026–2033, and
- invested capital grows at simply an 8% CAGR from 2023-2032, then
the inventory can be value simply $93/share at present – a 68% draw back to the present value. On this state of affairs, Tesla improves ROIC to 85% in 2032, nonetheless above Apple’s (AAPL) TTM ROIC.
Lastly, in my third DCF state of affairs, if I estimate extra cheap (however nonetheless very optimistic) development for Tesla, the inventory is value simply $26/share. Right here’s the maths, assuming Tesla’s:
- NOPAT margin is 11.5% in 2023 and falls to 7% (equal to Toyota’s TTM margin) in 2024–2032,
- income grows at consensus charges in 2023 (27%), 2024 (26%),
- income grows 15% a yr from 2025 – 2032, and
- invested capital grows at a 6% CAGR from 2023-2032, then
the inventory can be value simply $26/share at present – a 91% draw back to the present value. On this state of affairs, Tesla nonetheless improves its ROIC to 36% by 2032.
Determine 2 compares Tesla’s historic ROIC to the ROIC implied within the above situations as an example simply how excessive the expectations baked into Tesla’s inventory value stay.
Determine 2: Tesla’s Historic and Implied ROIC: DCF Valuation Situations
Tesla Priced to Generate Extra Earnings Than Apple
Subsequent, I quantify the NOPAT expectations in every of the DCF situations outlined above.
In state of affairs 1 (expectations within the present value), Tesla would obtain a NOPAT margin equal to its firm file (already fallen to 11.5% over the TTM) and would generate $220 billion in NOPAT in 2032. At $220 billion, Tesla’s NOPAT can be 3.5x all incumbent friends’ TTM NOPAT and a couple of.2x Apple’s (AAPL) TTM NOPAT, which, at $98.1 billion, is the very best of all firms I cowl. Mixed incumbent friends’ NOPAT consists of Stellantis, Toyota, Basic Motors, Honda Motor, Ford, and Nissan.
In state of affairs 2 (expectations in $93/share), Tesla grows NOPAT to $74.4 billion, or almost 8x its TTM NOPAT and 1.2x the mixed TTM NOPAT of friends.
In state of affairs 3 (expectations in $26/share), Tesla nonetheless grows NOPAT to $27.3 billion, or 3x its TTM NOPAT and larger than every of its particular person incumbent friends.
Determine 3 compares the agency’s historic NOPAT to the NOPAT implied within the above situations as an example simply how excessive the expectations baked into Tesla’s inventory value stay. For extra context, I present Apple’s, Toyota’s, and the mixed incumbent friends’ TTM NOPAT.
Determine 3: Tesla’s Historic and Implied NOPAT: DCF Valuation Situations
Tesla Priced to Personal 59%+ of the World Passenger EV Market
Tesla promoting 1.6 million vehicles over the TTM isn’t any small feat. Nonetheless, that quantity is minuscule in comparison with the variety of autos Tesla should promote to justify its inventory value.
Under, I quantify the car gross sales, together with the implied market share of these gross sales, implied by the income Tesla generates in every of the DCF situations above. I begin by analyzing the implied gross sales baked into its present inventory value.
In state of affairs 1 above, Tesla generates $1.7 trillion in income in 2032. If I assume automotive income stays at 86% of complete income as within the TTM, then Tesla generates $1.5 trillion in automotive income. This income determine implies Tesla will promote the next variety of autos based mostly on ASP ranges:
- 31.0 million autos – present ASP of $47.2k
- 29.9 million autos – ASP of $48.8k (common new automotive value in U.S. in June 2023)
- 51.6 million autos – ASP of $28.3k (common new automotive value internationally in 2022)
For reference, Toyota (TM), the world’s largest automaker, offered 10.5 million autos in 2022 and is projected to promote 10.4 million in 2023. Subsequent, I can analyze implied market share of such gross sales quantity based mostly on the “acknowledged insurance policies” state of affairs from the Worldwide Power Company (IEA) for the potential dimension of the market in 2032. Models offered in 2032 assumes that the EV market grows YoY from 2030-2032 on the similar compound annual development fee the IEA initiatives gross sales will develop from 2025-2030.
On this state of affairs, the car gross sales famous above would symbolize the next implied market share in 2032:
- 59.0% for 31.0 million autos
- 57.1% for 29.9 million autos
- 98.5% for 51.6 million autos
Determine 4: Tesla’s Implied Car Gross sales in 2032 to Justify $290/Share
The chance of reaching any of the above-mentioned market share situations is extraordinarily unlikely in such a aggressive trade. As famous above, Tesla at present holds ~12% and 9% market share in Europe and China, respectively. Even Tesla’s estimated 59% EV share (and falling) within the U.S. wouldn’t be sufficient to justify its inventory value on the low finish of ASPs within the state of affairs illustrated above.
In DCF state of affairs 2 above, Tesla’s implied automotive income of $558.0 billion implies it’s going to promote 11.8 million autos in 2032 at an ASP of $47.2k. 11.8 million autos additionally implies a 23% share of the worldwide passenger EV market in 2032. For reference, Volkswagen, the world’s second largest automaker, offered 8.3 million autos in 2022.
In DCF state of affairs 3 above, Tesla’s implied automotive income of $336.6 billion implies it’s going to promote 7.1 million vehicles (14% of the worldwide passenger EV market in 2032) in 2032 at an ASP of $47.2k.
Reverse DCF Math: Assume Tesla’s “Different Companies” Are Wildly Profitable
Bulls will typically argue that Tesla will not be “only a automotive firm” which is the explanation for its lofty valuation. In a number of prior reviews, I’ve proven why such an argument doesn’t maintain water. Nonetheless, for illustrative functions, let’s assume bulls are proper.
Utilizing the identical assumptions because the DCF state of affairs above, however optimistically assuming Tesla’s automotive income falls to 60% of complete income by 2032, I assessment the implied car gross sales assuming autos are solely 60% of Tesla’s enterprise sooner or later. For argument’s sake, I optimistically assume that Tesla achieves the identical NOPAT margin and ROIC on the 40% of income from its “different companies’ that it could obtain on its automotive income. Given the dearth of success in its different companies so far, this appears an optimistic assumption, however permits me to create greatest case situations, nonetheless.
Within the DCF state of affairs 1 above, Tesla generates $1.7 trillion in income in 2032. If autos are solely 60% of complete income, then, I’ve $1.1 trillion in automotive income. This income determine implies Tesla will promote the next variety of autos based mostly on these ASP ranges:
- 21.5 million autos – present ASP of $47.2k
- 20.8 million autos – ASP of $48.8k (common new automotive value in U.S. in June 2023)
- 35.9 million autos – ASP of $28.3k (common new automotive value internationally in 2022)
The car gross sales famous above would symbolize the next implied market share in 2032:
- 41.1% for 21.5 million autos
- 39.7% for 20.8 million autos
- 68.5% for 35.9 million autos
In different phrases, even when I assume that Tesla’s automotive income makes up simply 60% of its complete income in 2032, it nonetheless should take at the very least 40% of the anticipated 2032 world EV market share to justify its present inventory value.
I can even calculate the implied car gross sales within the two further DCF situations assuming Tesla’s automotive income equal 60% of complete income in 2032.
In DCF state of affairs 2 above, Tesla’s implied automotive income of $388.0 billion implies it’s going to promote 8.2 million autos in 2032 at an ASP of $47.2k, which equals 16% of the worldwide passenger EV market in 2032.
In DCF state of affairs 3 above, Tesla’s implied automotive income of $243.0 billion implies it’s going to promote 5.0 million vehicles (10% of the worldwide passenger EV market in 2032) in 2032 at an ASP of $47.2k.
Reverse DCF Math: Above Situations Could also be Too Optimistic
Every of the above DCF situations assumes Tesla’s invested capital grows between 6-15% compounded yearly by 2032 because it will increase manufacturing capability to fulfill the implied car gross sales in every state of affairs. This assumption is extremely conservative, as Tesla’s invested capital has grown a lot sooner up to now. For reference, Tesla’s invested capital grew 50% compounded yearly from 2012 – TTM.
In different phrases, I purpose to offer inarguably best-case situations for assessing the expectations for future market share and earnings mirrored in Tesla’s inventory market valuation. Even doing so, I discover that Tesla is considerably overvalued.
Disclosure: David Coach, Kyle Guske II, Hakan Salt, and Italo Mendonça obtain no compensation to jot down about any particular inventory, sector, type, or theme.
Determine I reveals the highest 5 firms within the S&P 500 ranked by 3-yr common ROIC. As may be seen, solely two firms earn a better ROIC than the ROIC implied in Tesla’s present inventory value.
Determine I: Highest 3-12 months Common ROIC in S&P 500: TTM as of July 19, 2023