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Tesla Stock: The Last Bubble Standing (NASDAQ: TSLA)

Bill Pugliano/Getty ImagesNews

The thesis

You’re here (NASDAQ: TSLA) has captured the minds of investors around the world. The business has become more of a slot machine than an investment; in 2021, TSLA was the most traded stock among retail investors.

Most Traded Stocks

Most Traded Stocks (Degiro)

So why isn’t Tesla completely collapsing in the face of this bear market? Well, autos are still enjoying an unprecedented wave of sales, and investors are ignoring the cyclicality of earnings. In a deep recession, Tesla’s profits can and probably will drop, along with those of every other automaker. At that time, the air will come out of Tesla’s stock.

Cars against recession

Recessions become unpleasant for automakers. History has shown that no matter who you are, when big recessions hit, automotive revenues not only go down, but generally turn negative in this capital-intensive industry. In 2009, automakers were completely crushed, recording negative net profit across the board:

Chart
Data by Y-Charts

You may ask, “What about the 2020 recession?” Well, 2020 was unlike any recession in the past. The government sent out so many stimulus checks that consumers’ bank accounts actually swelled. Combined with the lowest interest rates in 5,000 years, buying a $50,000 car has become more affordable than ever.

U.S. consumer cash balances

US Consumer Cash Balances (RSM)

Disconnected management

As the bubble bursts, Elon Musk has been sale Tesla shares hand on fist, with excuses like this:

Tweet by Elon Musk

Tweet by Elon Musk (Bloomberg)

That’s not what we like to see from our CEO. To be fair to Musk, he tweeted this in 2020, when the stock was at $140 per share:

Tweet by Elon Musk

Tweet by Elon Musk (Quora)

TSLA currently has a 1% yield on what is likely an industry high. It seems to us that Elon is leaving.

With the product, Musk is try to buy Twitter (TWTR) outright. Keep in mind that Musk isn’t just focusing his time and attention on this, but on SpaceX, which is arguably a more promising venture. The space industry should reach $1 trillion in turnover by 2040.

A fundamental look at Tesla’s growth

Tesla is going global and getting closer to its customers, with new factories in Shanghai, China, and Berlin, Germany. One would think that this decision would increase Tesla’s market share. But from 2020 to 2021, Tesla’s global market share actually fell by 17% a little less 14%.

Competition comes from everywhere. With a 14% market share, Tesla is more likely to lose share than gain. Companies like Honda (HMC) (OTCPK:HNDAF), BMW (OTCPK:BMWYY), Ford (F), GM (GM), Hyundai (OTCPK:HYMTF), Jaguar, Kia (OTCPK:KIMTF), Mazda (OTCPK: MZDAY) (OTCPK: MZDAF), Mercedes (OTCPK: DDAIF) (OTCPK: DMLRY), Mitsubishi, Nissan (OTCPK: NSANY) (OTCPK: NSANF), Stellantis (STLA), Subaru (OTCPK: FUJHY) (OTCPK: FUJHF) , Toyota (TM) (OTCPK:TOYOF), Volkswagen (OTCPK:VWAGY) (OTCPK:VLKAF) (OTCPK:VWAPY) and Volvo (OTCPK:VOLAF) (OTCPK:VLVLY) (OTCPK:VOLVF) are all add electric vehicles to their queues. Many of these companies have strong, entrenched brands and are partnership with EV titans like BYD (OTCPK:BYDDF). On top of that, they produce electric vehicles that are more affordable for the average consumer.

Global electric vehicle market share

Global electric vehicle market share (Statista)

Tesla’s margins could also decline. A colder economy, increased competition and the coming of used electric vehicles online means that the price of buying an electric vehicle could actually come down over time. Tesla has benefited from government credits, but those credits could dissipate now that electric vehicle companies like Tesla are profitable and highly valued.

To understand where Tesla is going, we need to understand where the industry is going. The number of electric vehicles sold worldwide is planned to grow at 17.5% per year through 2030. Tesla’s energy business grew revenue to 21% per year over the past 3 years.

95% of Tesla’s revenue still comes from the automotive branch:

Tesla Revenue Breakdown

Tesla Revenue Breakdown (2021 Annual Report)

Given market share, margins and industry risk, we estimate that Tesla will simply match the growth in global electric vehicle sales, growing 17.5% annually. The energy business should continue to grow and become profitable, which will partly alleviate the problems mentioned above.

Evaluation

Our 2032 price target for TSLA is $683 per share, indicating a yield of 0% per year, with no dividends.

  • Tesla has earnings of $7.78 per share, giving it a PE of nearly 100. If Tesla’s EPS is expected to grow 17.5% per year, in 2032 we have earnings of $39 per share. While the typical automaker trades at just 10 times normalized earnings, Tesla continues to benefit from the transition to electric vehicles and is expected to have a larger footprint in clean energy generation and storage in 2032. We applied a terminal multiple of 17.5 times earnings, representing a 75% premium to the average automaker. Remember that the automotive industry is cyclical, competitive and prone to bankruptcy. It’s hard to justify a higher multiple unless our risks to the thesis materialize.

Risks for the thesis

Tesla’s future is very uncertain. Elon Musk has all kinds of stories for investors revolve around autonomous driving, robotics, carpooling and artificial intelligence. However, we don’t yet have substantial revenue from Musk’s many great ideas. When that revenue materializes, the companies are likely to be loss-making, much like TSLA’s energy business so far. Competition will be strong in these areas. Autonomous trainingfor example, drew competition from Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Uber (UBER), General Motors, Nvidia (NVDA), Baidu (BIDU), Ford, Aptiv (APTV) and Luminar Technologies (LAZR ).

Robot Tesla

Tesla Bot (wired)

If Elon Musk’s attention doesn’t stray too far, the company could win in one or more of these areas, which would be a boon to long-term earnings and Tesla’s terminal multiple.

For more on the Tesla bull thesis, readers can check out complaints by Cathie Wood, who says the stock will quintuple in a few years.

Conclusion

Tesla is in an awkward position. With a huge market cap, a 1% yield and a few empty promises, Tesla stock is full of air. Which pin will burst the bubble? The next recession should spell the end. Almost everyone in the auto industry reported negative net income in 2009. On top of that, Elon Musk sold shares out of hand and turned his attention to SpaceX and Twitter. That’s not positive for Tesla’s plans for self-driving and AI. Competition is intensifying across Tesla’s businesses, which could put pressure on the company’s margins and market share. Although our estimated growth is higher for Tesla than any other company we’ve covered, the valuation just doesn’t make sense. We have a “strong sell” rating on the stock.