I am neutral on Tesla, Inc. (NASDAQ:TSLA), as its advanced technology, market leadership, brand power, and visionary CEO are offset by its sky-high valuation.
Tesla is an American automobile manufacturer known primarly for creating high-performance, luxury EVs. It is an innovative company that brings together a variety of products and technologies to make lives easier.
Tesla also sells solar panels, energy storage devices, as well as the technology behind self-driving cars. (See TSLA stock charts on TipRanks)
Strengths
Tesla’s main competitive strength stems from its visionary CEO Elon Musk.
The company has been selling solar panels to help customers shift towards cleaner energy sources, and is also introducing new products, like a home battery. These would be backup power sources during emergencies, or when electricity prices are high.
Tesla has also started its own cryptocurrency, TeslaCoilCoin, to further explore ways blockchain technology could benefit consumers.
Recent Results
The company has only recently begun to make a profit, but the stock price has increased by 65% over the past year.
Furthermore, Tesla broke new records in the second quarter of 2021, producing and delivering over 200,000 vehicles. It also achieved an operating margin of 11%, and exceeded $1 billion in GAAP net income for the first time in its history.
In Q2, Tesla was also successful in launching Tesla Vision, a camera-based autopilot system. This success is attributed to Tesla’s access to data from over 1 million vehicles, to source a large and diverse dataset that can be used for deep learning applications, such as Autonomous Driving (AD).
Solving full AD is a difficult engineering challenge, which Tesla believes will only come true through collecting and analyzing real-world datasets, with cutting-edge AI application techniques.
Valuation Metrics
While Tesla’s second-quarter report showed that the company continues to make strong progress and generate exciting growth, its valuation remains very elevated.
Furthermore, the company's NTM price to normalized earnings ratio is 112.9x. Growth remains strong, but is expected to slow in the coming years. Revenue is growth expected to come in at 59.6% this year, before declining to 35.1% in 2022.
Normalized earnings per share are expected to see a similar trend, with robust growth this year slowing to 33.2% growth in 2022.
With rising competition across the EV space, and Tesla continuing to scale, revenue growth should continue to decline moving forward, making the current valuation just a bit too high.
Wall Street’s Take
From Wall Street analysts, Tesla earns a Hold recommendation, based on 12 Buy ratings, seven Hold ratings, and six Sell ratings in the past three months. The average TSLA price target of $697.90 puts the downside potential at 5.6%.
Summary and Conclusions
Tesla has a lot going for it.
That said, the valuation is very rich after an incredible run over the past few years, and Wall Street analysts are also cautious on the stock at these levels.
Therefore, investors may want to wait for a pullback before buying shares.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
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