When I’m looking to buy shares of a company, I will first look at its business fundamentals and future prospects. If things look good, I’ll place the company on my watchlist. Then I move on to look at its valuations and do some very basic technical analysis to find a good entry point.
One example of a company with great business fundamentals and prospects is Tesla (ticker TSLA). Tesla is wildly popular electric vehicle manufacturer, with adjacent businesses/competencies in batteries, solar panels, autonomous driving software, and maybe most interestingly artificial intelligence and robotics (future). Most if not all of these business lines are products with great potential as we move towards a future of renewable energy and AI/robots.
Most will agree on Tesla’s potential (from the logical voices I’ve heard), but what’s polarising about Tesla seems to be its extremely expensive valuation according to the usual financial metrics. Tesla has a P/E ratio ~300x last I checked or some other crazy number. Bears will compare Tesla’s P/E to other automakers like Toyota, VW, GM or Ford of which Ford has the highest P/E of “only” 35x. Tesla also has the largest market cap by far at $1.0T, more than triple the next largest company Toyota.
For me to go out and buy Tesla stock, first I need to make sense of its valuation and convince myself that I’m not paying through my nose for a piece of the EV dream.
After going through many Tesla articles, blog posts and YouTube videos, I’ve concluded Tesla’s valuation can only be justified by its GROWTH prospects, both vs incumbents and vs other Big Tech stocks.
As at time of writing (14th Jan 2022):
| Company | Market cap | Revenue TTM | PE TTM | P/S | Rev growth YOY (5Y Avg) |
| Tesla (TSLA) | $1.07T | $46.85B | 361 | 23 | 55% |
| Toyota (TM) | $285B | $281B | 10 | 1 | 0.5% |
| VW (VWAGY) | $137B | $294B | 5 | 0.4 | 2.4% |
| Ford (F) | $97B | $135B | 34 | 0.7 | -3.0% |
| General Motors (GM) | $89B | $131B | 8 | 0.7 | -2.7% |
| Apple (AAPL) | $2.86T | $365B | 31 | 8 | 8.5% |
Looking at the table above, Tesla looks overvalued by almost every metric BUT its growth rate is crazy high for such a large cap company pulling in almost $50B in annual revenue (and growing fast).
To further convince myself, I attempted to estimate Tesla’s future revenue for the next 3-5 years. For longer term investments like those in our Family Portfolio, I try to look at least 3-5 years in the future to determine if a company is worth investing in. Of course, there’s a lot of guesswork and estimates but it does help provide me a certain level of confidence and conviction in my stock holdings.
In trying to figure out how to estimate Tesla’s future revenue, this YouTube video from Tesla Economist gave me a lot of insight. I’ve independently tried to estimate Q4 2021 revenues and came up with a similar number of $17B.
As I extrapolate to future years of course the estimate will get more and more uncertain. I’m somewhat confident in estimating revenues for Tesla because the bulk of Tesla’s revenue is still pretty much tied to car sales, which is a function of production/deliveries and average selling prices (ASP). Other revenue streams though promising, are still insignificant.
Although my calculations are of course more simplistic, I’m going out of a limb to estimate Tesla’s 2025 revenue to hit $140B. I’m not going into details of my estimates which will likely be off anyway, but do let me know if you’re interested.
Based on that 2025 revenue estimate, Tesla is currently trading at P/S of around 8x at today’s price of ~$1,030. That would roughly bring it in line with Apple’s (AAPL) current valuation. Of course, that’s still 4 years away so hopefully my estimates are conservative and Tesla grows faster than that. Anyway, if Tesla can maintain a high growth rate, it might command a higher P/S then too.
I used Apple because in my mind Tesla appears to have similar company profile as Apple. For instance, both own the hardware and software stacks, control their own supply chain, have cult-like following, and innovate rapidly.
I’ve made a lot of assumptions and guess-timates in arriving at this revenue number, and it might all turn out to be rubbish. However, it does help give me confidence that Tesla’s valuation doesn’t seem to outrageous even at these prices, and the conviction to buy more Tesla stock during dips.
As usual, this is not financial advice and please DYODD, but hope this is helpful.
Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.
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