Is Tesla Stock Justifiably Overvalued?

Tesla’s stock isn’t a bargain and trades at a premium. However, its high valuation reflects expectations of substantial growth, driven by the company’s innovative approach and diversified expansion opportunities.

• Tesla’s multiples, including EV/EBITDA and P/E ratios, are notably higher than those of its peers.
• Analysts project an annual revenue growth rate of around 20% until 2028, aiming for total revenue to reach $250 billion.
• Tesla has multiple avenues for revenue growth, including Energy, Services, and the potential for robo-taxis and full self-driving (FSD), but challenges remain in realizing the full potential of these opportunities.

Tesla’s Stock: Are the High Valuations Justified?

While many analysts and investors believe there’s potential for Tesla’s (TSLA) – Get Free Report stock to rise, it’s hard to say that the electric vehicle (EV) stock is a bargain. That’s especially the case when you compare Tesla to other automakers, including its rival BYD (BYDDY) .

Currently, Tesla’s stock is trading at a premium with an EV/EBITDA (earnings value to earnings before interest, taxes, depreciation, and amortization) ratio of around 42.4x LTM (last 12 months), which is more than three times higher than the industry peers illustrated in the chart below. The P/E ratio stands at about 71x.

However, it’s crucial to recognize that multiples don’t always capture the complete potential value of a company, especially one expected to achieve rapid growth. That leads us to consider Tesla’s growth avenues and how it plans to deliver this expansion, all while keeping an eye on market expectations.

Deciphering Tesla’s Growth Prospects and Challenges

According to data from Koyfin, analysts are in consensus about an annual revenue growth rate of approximately 20% until 2028, projecting total revenue to reach $250 billion. This growth trajectory is also underpinned by expectations of improving gross and operating margins, which bode well for cash-flow generation.

When we examine Tesla’s revenue targets, the projected $250 billion for 2028 is significantly higher than the revenue figures of the traditional automakers shown in the first chart.

For instance, in 2022, Ford (F) – Get Free Report reported a net revenue of $158 billion, while General Motors (GM) – Get Free Report posted $156.7 billion in revenue. In that same year, Tesla delivered an impressive $81.46 billion in revenue.

On the other hand, achieving this growth is far from impossible. Unlike its conventional counterparts, Tesla possesses multiple avenues for expansion that could substantiate revenue growth and potentially drive improvements in profitability.

In addition to vehicle sales, Tesla generates revenue from Energy (Storage Solutions and Energy Generation) and Services, such as Supercharging, Insurance, and body shop and part sales.

Furthermore, we can mention robo-taxis and Tesla’s full self-driving (FSD) unit as a future growth avenue that not only has the potential to increase sales but may also have better margins. To make this happen, FSD needs to be further developed.

Currently, FSD is in version 12, with 0.5 billion miles driven, and the company is moving toward significant advancements, given its investments in a cluster of 10,000 GPUs (graphics processing units) that increase training capacity and, consequently, progress toward Autopilot.

Another product that highlights Tesla’s innovation, albeit in its early stages, is the Cybertruck. Musk emphasized during Tesla’s third-quarter earnings call that, although the Cybertruck is an amazing product, there are still challenges to achieving production volume and turning its cash generation positive. Even with these challenges, it remains a potential catalyst for another addressable market for Tesla: the truck market.

In Summary

Taking this (limited) information into account, two key takeaways emerge: First, Tesla’s shares are trading at relatively high multiples compared to its traditional peers, signifying expectations of substantial growth. Second, Tesla stands out as an innovative company with numerous avenues for expansion.

Estimating the complete extent of Tesla’s addressable market is still a challenging task, especially with the potential in emerging sectors like robo-taxis and other electric vehicle solutions.

In conclusion, while Tesla’s stock is by no means a bargain, a premium valuation (particularly when contrasted to its more conventional competitors) appears to be justified