Tesla (NASDAQ:TSLA) stock is up by about 5x year-to-date. While Tesla’s fundamentals have improved in recent quarters- with margins and deliveries trending higher, much of the stock price gains have come from the expansion of Tesla’s valuation multiple. Investors are betting that Tesla’s lead in the EV and self-driving software space – two of the most powerful trends in the auto market – will help it shape the future of transportation. However, Tesla’s stock has a considerable downside if this story doesn’t play out. Below, we outline a scenario that could see Tesla stock decline by about 65% from current levels by the year 2023 – driven by stronger competition from mainstream automakers, the emergence of a strong challenger in the self-driving space, or weaker than expected sales of Tesla’s new models. While our scenario doesn’t assume that Tesla’s Revenues will decline in the near-term, even slower growth or weaker than expected margin expansion due to the above factors could cause investors to rethink Tesla’s valuation multiple, impacting the stock.
We spell out more details in our interactive dashboard analysis on Tesla Downside. Parts of the analysis are summarized below. Deeper insights on Tesla’s Revenues and Tesla’s Expenses are also available separately as context to this analysis. Additionally, we provide a counter analysis to our Tesla downside case in our interactive dashboard for Tesla Stock Upside: $1,000.
Tesla’s Deliveries Growth Slows Considerably
Tesla’s Deliveries have grown at a healthy pace (average of about 65% per year over the last 4 years), driven by the launch of mass-market models such as Model 3, but there are multiple factors that could impact the company’s growth going forward. Firstly, the barriers to entry in the EV market are not really high. Mainstream and luxury auto companies – which already have much of the engineering and manufacturing capabilities – could partner with technology majors for self-driving and other connected capabilities and launch more compelling EVs, potentially reducing interest in Tesla’s cars. Secondly, Tesla’s Chinese business – which has been the biggest driver of its growth (accounting for about a third of Tesla’s Q2 deliveries) could also pose a risk considering frosty relations between the U.S. and China. (Trump’s China Posture Is Scary For Tesla) Moreover, there is also a risk that Tesla’s upcoming vehicles such as the Cybertruck may not be as well received. For perspective, the Model Y – which was launched earlier this year apparently hasn’t sold as well as initially expected, with Tesla reducing the vehicle’s pricing a few months after launch. If Tesla’s Deliveries grow at a slower pace from about 370k in 2019 to 740k vehicles by 2023 (with the growth rate declining from around 50% in 2019 to 10% in 2023) and Average Selling Prices decline from about $59k in 2019 to about $50k by 2020, Tesla’s Revenues would grow from around $30 billion in 2020 to about $44 billion by 2023.
Tesla’s Net Margins
Tesla’s Margins are likely to rise to about 6% in 2020, up from negative levels in 2019 and investors are counting on the company to post industry-leading Net Margins in the near future, driven by its autonomous driving software sales, battery advancements, and greater scale. However, if Tesla’s lead in self-driving is challenged by the major tech players such as Google – which could eventually follow a model similar to Android to license out its system – or other tech majors who have the capital and expertise in areas such as Artificial Intelligence, this could limit Tesla’s ability to drive software sales and margins. (Where Does Tesla Stand Versus Google & Others In Self Driving) Moreover, if other manufacturers are able to cut down battery costs to levels similar to Tesla’s via a greater scale or the availability of new technologies, this could also limit Tesla’s ability to boost margins. If Tesla’s Margin Expansion slows, with Net Margins rising from around 6% in 2020 to just about 9% in 2023, Net Income would grow from around $1.8 billion in 2020 to about $4 billion by 2023. (How Do Tesla’s Software Sales Impact Its Margins)
Investors Could Sour On Tesla’s Story If Growth Slows, Margins Expansion Disappoints
If Tesla’s growth slows and investors see proof points that mainstream automakers and technology titans can challenge Tesla in the EV and self-driving technology space, this could significantly impact Tesla’s valuation. Tesla’s valuation multiple stands at about 225x based on projected 2020 results. This compares to an average of about 15x for the Auto & Truck industry, 13x for Toyota – the largest and most efficient automaker, and about 11x for GM in 2019. If Tesla’s P/E multiple declines to about 35x – well below its present levels although ahead of other automakers – the company could be valued at a market cap of roughly $145 billion or about $150 per share by 2023, based on a Net Income of about $4 billion in 2023.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 50% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
See all Trefis Price Estimates and Download Trefis Data here
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.