Time to Dive Into Tesla

Standing out among the Street's worst performers today is Tesla, an auto manufacturers company whose shares slumped -3.7% to a price of $189.82, 29.75% below its average analyst target price of $270.2. The average analyst rating for the stock is buy. TSLA lagged the S&P 500 index by -3.7% so far today and by -23.5% over the last year, returning -42.2%.

Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

Tesla's trailing 12 month P/E ratio is 60.8, based on its trailing Eps of $3.12. The company has a forward P/E ratio of 33.7 according to its forward Eps of $5.64 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US consumer cyclical companies is 24.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.

When we divide Tesla's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 1. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Tesla's gross profit margin trends:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2021-12-31 53,823,000,000.0 40,217,000,000.0 25.28 20.27
2020-12-31 31,536,000,000.0 24,906,000,000.0 21.02 26.93
2019-12-31 24,578,000,000.0 20,509,000,000.0 16.56 -12.06
2018-12-31 21,461,000,000.0 17,419,000,000.0 18.83 n/a
  • Average gross margin: 20.4 %
  • Average gross margin growth rate: 11.7 %
  • Coefficient of variability (lower numbers indicating more stability): 18.2 %

Tesla's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Tesla was $4,983,000,000.00 as of its last annual report.

This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, TSLA is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 267.6% and has on average been $2,111,500,000.00.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Tesla's P/B ratio is 15.0 -- in other words, the market value of the company exceeds its book value by a factor of more than 15, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.11 as of the third quarter of 2022.

Tesla is likely overvalued at today's prices because it has an inflated P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows with an upwards trend. The stock has mixed growth indicators because of its consistently average gross margins that are increasing, and an average PEG ratio. We hope this preliminary analysis will encourage you to do your own research into TSLA's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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