When it comes to Tesla (TSLA), valuation is an unfashionable metric. For the electric car maker, there has been a major disconnect between the fundamentals and the valuation, and now, one analyst is getting to the bottom of it.
Needham’s Rajvindra Gill tells clients he has never seen a stock “rise that much that fast with such little regard to past fundamentals.” Shares have skyrocketed 451% year-to-date, compared to the S&P 500’s 8% gain. To this end, he took a look at TSLA’s unprecedented valuation to eliminate the noise surrounding this company.
As part of this analysis, Gill asked “three fundamental questions: 1) Have Street estimates actually moved in sympathy with the meteoritic rise in the share price during two critical breakpoints (July 2019 to March 2020 and March 2020 till today)? 2) assuming the long view, what stock price does a 10-year discounted flow analysis (DCF) yield? and 3) in the relative near-term, what are the ranges of share prices when applying leading technology and AI P/E multiples to a range of EPS scenarios?”
Looking at these breakpoints, between July 2019 to March 2020, shares appreciated by as much as 386%. At the same time, forward sales and EPS estimates moved sideways or in some cases, actually declined. “This started to create a large disconnect between TSLA stock and its underlying fundamentals,” Gill noted.
From March 2020 to the present, even though some estimates such as CY22 non-GAAP EPS grew by 42%, the stock rose by as much as 490%, creating “a further disconnect between the price and the stock's underlying fundamentals,” in Gill’s opinion.
Performing a 10-year DCF-based intrinsic value analysis, Gill estimated a total 10-year sales CAGR of 21% to 2029, which would imply that TSLA will become the top car manufacturer by units sold. The conclusion? Gill’s 2029 base case indicates a share price of $365, or 14% downside at current levels when discounting 10-years of free cash flow back to today's levels.
As for the multiples-based stock value on CY 2022 estimates, it further demonstrates that shares are overvalued, according to Gill.
Expounding on this, the analyst stated, “Tesla bulls argue that the company deserves a multiple that is in the range of leading technology and Artificial Intelligence companies, such as Amazon, Apple, Facebook, Google, Netflix and NVIDIA, which are growing quickly and profitable, and trade at approximately 35-45x forward EPS. While Tesla has demonstrated sales growth, it has not shown the consistent profitability that warrants such a multiple, in our view.”
Even if a “generous leading-technology-firm multiple of 45x-50" is applied to a bull case EPS estimate of $6.60, the stock price target clocks in at $330, reflecting 24% downside from current levels.
Therefore, Gill continues to give TSLA an Underperform (i.e. Sell) rating, without suggesting a specific price target. (To watch Gill’s track record, click here)
Turning now to the rest of the Street, other analysts are cautious about TSLA. With 7 Buys, 13 Holds and 10 Sells, the word on the Street is that TSLA is a Hold. At $326.88, the average price target implies 27% downside potential. (See TSLA stock analysis on TipRanks)
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