It’s been another scintillating year for Tesla (NASDAQ:TSLA) shareholders with the stock roaring higher by 123.1% year-to-date. Compare that to the S&P 500, up 18.3% for the year and the “alpha” or relative outperformance has been jaw-dropping.
Looking forward, can Tesla continue to deliver such remarkable returns? A host of reasons suggest the future remains very bright for long-term shareholders.
What Makes Tesla Special?
It was clear from the outset that Tesla was going to do things differently than most firms. While Elon Musk made it clear that the company would register patents for its innovations, he also made it clear that Tesla would not be suing companies who, in good faith, planned to accelerate the development of electric vehicles using Tesla’s open-source technology.
In Silicon Valley where the competitive landscape is more akin to “dog-eat-dog“, this refreshing approach was aligned with Musk’s broader vision to spur widespread adoption EV technology.
As Tesla built out its manufacturing facilities another key development that differentiated it from arch rivals was its battery supply chain diversity. Management made substantial investments in battery manufacturing and development, thereby reducing dependency on single suppliers and mitigating risks of raw materials shortages.
But manufacturing a completely different type of car to the traditional gas-powered one, and innovating on supply chain logistics was just the start of what made Tesla stand out. Musk and his team figured out how to commercialize differently too. Instead of selling cars off a lot, Tesla bypassed the traditional haggle, offered fixed prices and then ventured beyond car sales to offer insurance too.
The company’s insurance product set itself apart from existing offerings by using real-time data to set rates. The fallout from such a disruptive approach is yet to be determined and could have far reaching consequences for the auto insurance industry.
Those innovations alone would be enough to shake up most car manufacturers business models, but Tesla didn’t stop there. The best was yet to come.
Tesla’s business model focused early on to integrate vertically everything from manufacturing and battery production to software development. The end-to-end integration allowed Tesla to control its own supply chain and product quality, as well as to manage capital expenditures and the risks of operational complexity.
And speaking of software development, Tesla’s Autopilot and Full Self-Driving (FSD) features really stamped its authority on the auto industry, separating it from the pack of primarily hardware manufacturers who historically had given software an afterthought.
It’s not widely known by the average Tesla buyer that the company also has a an entirely different business division related to energy storage and solar, including its Powerwall product which forms a key part of its business strategy. While the auto business enjoys the media buzz, this segment has the potential to be a key revenue growth driver.
The combination of all these attributes has resulted in a product that is aspirational in the eyes of consumers and created demand across the globe. To meet pent-up buying requests, Tesla has broadened its reach from the U.S. to include China and Europe. That has resulted in the build of Gigafactories, like the one in Shanghai, to help keep costs in check and increase market penetration.
So, boiling it all down, what does it mean for Tesla stock? After all, great fundamentals and a winning business model are crucial but buying at a good price is where the big returns are made.
Is Tesla Stock Undervalued?
A lot of key financial metrics point in favor of Tesla stock now as a good buy, not least its very high return on invested capital that currently sits at 16.6%, well above the average for the S&P 500.
But on valuation, it’s a struggle to declare Tesla as cheap now. According to 36 analysts, Tesla stock is marginally overvalued by 2% with fair value sitting at $237 per share.
Running a discounted cash flow forecast analysis reveals a slightly more pessimistic view with intrinsic value calculated at $222 per share, suggesting as much as 7.8% downside now.
Indeed when comparing price to valuation, it does seem that sentiment has leaned quite negative recently with 23 analysts revising their targets downwards for the upcoming quarter.
So too does a price-to-earnings comparative analysis suggest TSLA share price is elevated. Tesla’s P/E ratio at this time is 70.7x, which compares unfavorably to the sector average of 9.1x.
With all that said, the clear revenue trend has been higher, and that is perhaps the most important line item of all the financial statements at this time – given that the company is cash rich and not too heavily indebted. Year-over-year revenues in 2023 came in for each of the three quarters up 24.4%, 47.2% and 8.8% respectively.
Speaking of cash on the balance sheet, it now sits at $15.9 billion and remarkably just $2.1 billion of long-term debt is on the books. If you compare that with Ford, by way of example of a legacy car manufacturer, which has $15.7 billion in cash and $19.3 billion in long-term debt you can see just how well Tesla is doing on that metric.
Wrap Up
Tesla is a highly volatile stock that has whipsawed traders time and again but for those who have stuck with it, the ride has been worth it.
The company’s business model is highly disruptive and innovative, leaving many of the legacy manufacturers scrambling and failing to play catch up, especially on the software side of the business.
By encompassing not just car manufacturing but full-self driving capabilities powered by cutting-edge artificial intelligence and an energy business that have the potential to be huge revenue drivers, Tesla is positioned to further grow and diversify revenues in the medium to long-term.
In the near-term it’s more difficult to make a case that the stock is on sale or has any meaningful margin of safety. It appears like many of the bullish forces have been priced in already so, for prospective buyers, a buy on the dip when volatility takes hold again might be the most strategic and smart play.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.
See The #1 Stock Now >>The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.