It’s been another banner year for Tesla (NASDAQ:TSLA) stock, up 106.9% for the year. The latest surge higher began on November 13 when the share price leapt higher by 4.22% on the day.
Despite its run-up for the year, far outperforming the S&P 500, which posted a year-to-date gain of 15.3%, speculation is rife about when the stock can eclipse July highs and reach the $300 line in the sand. Is it possible?
Tesla Has an Extraordinary Brand Advantage
Tesla has many advantages but one often overlooked one is its brand advantage. With a market capitalization of $682 billion, it might come as a surprise to some to learn that Tesla’s brand is worth an astonishing $67.7 billion, almost 10% of its entire valuation.
It’s a figure so large that it dwarfs the brand value of its nearest competitor, Toyota, which holds a brand value of $28.5 billion. Mercedes ($24 billion), BMW ($20.5 billion) and Porsche ($16.1 billion) take the next three spots to round out the top five.
That brand advantage is expected to ignite a wave of sales when Tesla launches a model for a price of $25,000, according to billionaire and early Tesla investor Ron Baron.
Like many bulls, he has expressed views that proclaim Tesla could rise to a trillion dollar valuation. If he is right, that would translate to a share price well north of $300 per share.
But do the fundamentals back it up?
Analysts Forecasts For Tesla Stock
Tesla has always been a polarizing stock with analysts entirely disagreeing on where fair value sits.
Those who subscribe to a “Tesla is a car company only” thesis generally lean bearish with their estimates, and indeed the lowest price forecast for Tesla sits at $80 per share, suggesting downside risk of 65%.
On the other hand, bulls cite the potential for Tesla to have its “AI moment” when a switch is flipped and all Tesla cars become autonomously driving vehicles thanks to FSD. The most bullish analysts forecast for Tesla puts a price target of $380 on the horizon.
Usually when analysts disagree by such a wide margin, the consensus target is best focused upon, and in the case of Tesla that level is $237 per share.
So, will Tesla stock hit $300? According to the consensus price target of 36 analysts, Tesla will not hit $300 per share in the next 12 months. Instead, they forecast that fair value is $237, representing 11.7% upside opportunity.
It’s worth highlighting that a discounted cash flow forecast analysis implies 3.2% upside to $230 per share.
What Most Investors Don’t Know About Tesla
While bulls and bears may debate the merits of owning Tesla stock, the reality is it does enjoy a wide economic moat that few other car manufacturers possess.
That is evident from its return on invested capital, which sits at 16.6%, well above the S&P 500 average of 10%. Tesla also has a return on equity of 23.1% and a return on assets of 12.8%, both of which are impressive for the industry.
Compare those numbers to American bellwether car manufacturer, Ford (NYSE:F) and you will quickly see how operationally effective Tesla is compared to its more mature peer.
Ford has a ROIC of just 4.5%, a return on equity of 14.3% and a return on assets of 2.4%, all underwhelming relative to Musk’s firm.
Tesla’s ability to scale up production to meet overwhelming demand in recent years and to sustain margins has been impressive, but those margins may now be in jeopardy.
As Tesla cuts prices, its gross and operating margins will naturally compress. Bears will point to those slimming numbers as evidence that, at scale, Tesla is no different from any other car manufacturer.
For comparison’s sake, Ford enjoyed gross profit margin of just 9.1% last quarter while Tesla posted 17.9% gross margins, almost double the amount.
One reason for the outperformance is the number of revenue channels Tesla enjoys that few other car companies can match. Tesla doesn’t just make money when the car is sold off the lot, so to speak, but enjoys residuals from software upgrades, subscriptions, and energy.
As a software-first company, Tesla has essentially wiped the floor compared to its peers, who have historically been primarily hardware-focused, on key profitability metrics.
Legacy car companies are struggling to catch up and Musk has made it clear what a challenge that will be by noting that Tesla sits on one of the best artificial intelligence softwares in existence.
Tesla continues to grow at a rapid pace with revenues up 28.1% over the past twelve months alone. Compare that to Ford, whose top line has grown 14.8% and you see that on every single metric discussed here, Tesla is beating its one of its arch-rivals. The truth is it’s doing so with virtually all of its competitors, with BYD, a Chinese manufacturer as the rare exception.
In China, BYD hiked prices at the same time Tesla cut prices in the US. Usually price-cuts are a sign of competitive pressures and margin slimming on the horizon.
Regardless, the future remains very bright for Tesla, particularly in the U.S. and Europe. As a result, the odds lean towards bullish analysts being right and the share price hitting the higher end of the analysts’ range.
If Ron Baron, early Tesla investor, is correct and TSLA valuation eclipses the $1 trillion mark, not only will Tesla hit $300 per share but it will leave that figure in the rearview mirror.
For long-term shareholders, Tesla offers a wild and turbulent share price ride but the returns, too, have been astronomical and the odds are the future will prove lucrative.
Of course, an economic slowdown could curtail demand but, in the words of Peter Thiel, don’t bet against Elon Musk.
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.