What Are the Fundamentals of Tesla (TSLA)?

Standing out among the Street's worst performers Friday is Tesla, a motor vehicles & passenger car bodies company whose shares slumped -2.57% to a price of $196.88, not far from its average analyst target price of $193.24. The average analyst rating for the stock is buy. TSLA lagged the S&P 500 by -17.83% over the last year, returning -27.07%.

Tesla, Inc. is an American electric vehicle and clean energy company based in Palo Alto, California. 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 57, based on its trailing EPS of $3.52. The company has a forward P/E ratio of according to its forward EPS of $5.5 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer cyclical sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.

It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.

Tesla's PEG ratio of 1.281 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.

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 (k) Cost of Revenue (k) Gross Margin YoY Growth
2022-12-31 $81,462,000 $60,609,000 25.6% 1.27%
2021-12-31 $53,823,000 $40,217,000 25.28% 20.27%
2020-12-31 $31,536,000 $24,906,000 21.02% 26.93%
2019-12-31 $24,578,000 $20,509,000 16.56% -12.06%
2018-12-31 $21,461,000 $17,419,000 18.83% n/a
  • Average gross margin: 21.45 %
  • Average gross margin growth rate: 7.28 %
  • Coefficient of variability (lower numbers indicating more stability): 18.47 %

We can see from the above that Tesla business is not strong and its stock is likely not suitable for conservative investors.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Tesla was $7,566,000,000.00 as of its last annual report. Over the last 4 years, the company's average free cash flow has been $2,985,455,200.00 and they've been growing at an average rate of 7958.236%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in TSLA have received an annualized dividend yield of 0.0% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Tesla's P/B ratio is 12.42 -- in other words, the market value of the company exceeds its book value by a factor of more than 12, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.12 as of the first quarter of 2023.

Since it has an inflated P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows with an upwards trend, Tesla is likely fairly valued at today's prices. The company has poor growth indicators because of an inflated PEG ratio and weak and inconsistent operating margins with a positive growth rate. We hope you enjoyed this overview of TSLA's fundamentals.

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.