Friday, October 26, 2018

Why Tesla could likely quadruple to 1287 in two years.

Tesla has been much the hype of late, with media outlets following Elon Musk's every move.  Admittedly there has been much drama, from broken romances to smoking (not even inhaling!) pot on a radio show, to SEC shenanigans.  None of this really matters very much, however it does serve to keep Elon stimulated in a difficult to explain sort of way, that only an entrepreneur might relate to.  He shouldn't be thwarted, but should stay within the law, as he really hasn't done very much inconsistent with other brilliant minds throughout history.  What should matter to shareholders has often been overlooked, and none of it should have to do with his behavior.  What matters for the company and its future stock price really boil down to four factors, most of which can easily be tracked,  and I will try to highlight my thinking on them in this post.  They are  1) Sales, 2) Production, 3) Delivery, and 4) Execution on the relatively new category that Tesla should lead globally, Mobility as a Service,  "MAAS".  So, any analysis here on Teslas' potential does not include MAAS, which when accounted for, would otherwise reflect a higher stock price than what is analyzed in this post.

I forecast net income, EPS, Sales, Production and Deliveries in the table in the link below.  I do not consider how execution of MAAS going forward will impact valuation, because it is still largely unknown.  With more research, I will try to forecast how MAAS will impact positively on potential equity value. Given successful delivery on promises such as sales, vehicle and battery production, I run a forecast based upon a conservative growth path that tracks at a slower pace than historical growth in these areas.  Based upon that analysis, and if Tesla is able to continue that growth path, Tesla should hit a stock price of around 523 within 12 months and 1,287 within 24 months.  Please review the link to the table below to see their growth numbers since 1st Quarter 2015.

Link to Tesla Growth

Tesla recently released a stellar 3rd quarter 2018, their best yet recording $360 million in net income.  Tracking a similar growth path as quarterly revenue growth, I use a modest 25% quarterly net income growth rate to imply a $609 million in net income this time next year and $1.5 billion in net income within 24 months.  I use 25% net income growth that is implied from the revenue growth numbers that have averaged 100% per year, sometimes a lot more, so 25% is quite conservative.  I also use a 25% Earnings Per Share growth to forecast EPS out for 8 quarters until 3rd quarter 2020.  I take the forecasted annual EPS and multiply it by a conservative 50 P/E, a similar multiple to high growth technology companies.  Given that Tesla owns and operates not only car production, but also battery and solar, it should not be valued like a typical car company, but moreover like a technology company able to produce high growth. Given Tesla has been growing across most of its metrics at 25%+ per quarter or 100% per year, a 50 P/E seems very conservative, especially given that I am not even adding in any sales from deploying autopilot taxi service (MAAS).  Elon has estimated that Tesla would share in that revenue at 30% of revenue earned by individual tesla owners, but again, I am not including MAAS in this analysis.

Using a 50 P/E implies a stock price of $659.05 in 3rd quarter, 2019, and $1287.21 in same quarter 2020, again, given the company grows its net income at a somewhat slower pace than it has proven to be able to grow its revenues, production and deliveries.  Of course, there have been some major  hiccups from quarter to quarter along the way, which is typical and should be expected going forward, but the revenue growth has been remarkably smooth for a new category like Tesla has led for the past 10 years since inception.

Tesla has delivered on almost all promises to date, typically taking a bit longer than predicted, but the company delivers what is promised, nevertheless, so at this point, any risk of the company remaining a viable entity is close to zero.

The news on Elon's eccentric personality is really just a distraction from what is really important and that is the rate of growth of sales, production, deliveries and soon, execution on MAAS.  MAAS should serve to expand the valuation multiple of Tesla significantly which would imply a much higher stock price than forecasted here.

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