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Is Tesla Stock a purchase now?

Tesla (NASDAQ: TSLA) is one of the hottest stocks in 2020. At the close of the market on Monday, the shares of the electric car manufacturer have risen by more than 250% since the beginning of the year. In the meantime it is S&P 500 has decreased by 2%. The rise in the share reflects investors’ growing confidence in the company’s long-term prospects as Tesla shows impressive execution.

But did the stock outperform itself? After all, the valuation of the stock now not only leads to massive business growth, but also to a significant improvement in profitability in the coming years.

Are stocks set for perfection? Or is there still room for Tesla shares?

Model 3 interior

Model 3. Image source: Tesla.

Valuation of the Tesla share

It is helpful for investors to understand exactly what kind of growth is priced into the stock today.

In order for Tesla’s market cap to grow by an average of 10% per year over the next 10 years from the current level, the company would need to have a market cap of approximately $ 721 billion in 10 years. What would it take to get such a high price? Tesla would likely need an annual net profit of around $ 14 to $ 15 billion. Assuming that the company trades 50 times the profit (reasonable value if Tesla really proves that it can grow so quickly in the next 10 years), Tesla could have a market cap of around 2030 Reach $ 700 to $ 750 billion.

What kind of sales growth could be needed to bring profitability to this level? If Tesla can reach BMWWith a net profit margin of about 5% in 10 years, the company would need sales of about $ 280-300 billion by 2030 to generate a net profit of about $ 14-15 billion, an average annual sales growth rate of about Means 27%. .

Are the expectations too high?

With Tesla’s revenue growing much faster than 27% a year over the past five years, the above scenario may be likely for some investors. However, the assumptions in this model involve some major risks. First and foremost, there is a possibility that profitability may prove to be more futile than Tesla shareholders expect. If Tesla’s growth slows significantly toward the end of this 10-year period, investors may not believe that the electric car manufacturer’s stock is worth 50 times the profit at that time. and if the stock is less than 50 in price-earnings ratio in 2030 (with a net profit of $ 14 to $ 15 billion), the stock’s return could be below average by then.

Of course, there is always the possibility that Tesla will exceed even the highest expectations of investors. For example, electric cars may become more profitable than gas cars, resulting in a much higher net margin than 5%. If Tesla’s software and driver assistance features are significantly improved and the automaker can expand its technological lead over the competition, the company may be able to make more money with its vehicle software than the market expects.

The range of possible results is enormous. Given the wild growth priced in Tesla stocks today, investors may want to hope the stock will drop to lower the risk of investing in a company whose price may be perfect.

Large catalysts on the horizon

Does this mean current Tesla shareholders should sell their Tesla shares? Not necessarily. Given the recent strong performance by the electric car maker, including the opening of a new plant in China in 2019 and the start of model Y delivery earlier this year, investors may want to hold on. Of course, this presupposes that shareholders are willing to endure considerable volatility. After such a huge increase in Tesla stock, volatility is almost a given in the coming months.

Tesla’s business may be at an early stage in its growth story. The automaker’s growth could also be substantial in the near future. For example, the company’s Model Y, launched in March, has the potential to outperform the company’s top-selling car (Model 3). After all, SUVs like the Y model often sell sedans in many markets. In addition, Tesla is particularly planning a significant expansion of production capacity this year – and is not planning a slowdown next year.

Later in the month, investors will get a timely look at Tesla’s business to see if it meets expectations. The electric car manufacturer reports a profit on July 22.

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