June 25, 2024 | Read Online | | Value Investor Daily #36 Is Tesla Going to $30 Trillion Market Cap? |
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| Subscribe to our free, daily email to start getting the best stock ideas sent to your inbox each morning. | | | | Tesla (NASDAQ: TSLA) is renowned for pushing boundaries and challenging expectations. | CEO Elon Musk's recent assertion that Tesla could reach a $30 trillion market cap (a gain of over 50x from today's market cap of $583B) has generated both excitement and skepticism. | Here's a recent video breaking down what Elon said at the recent shareholder's meeting: | | Elon Musk Just Made Tesla Investors 10X More Bullish & $30 MILLION For Palantir | Ep. 6 |
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| While the ambition is notable, evaluating Tesla's current valuation and growth prospects from a value investor's perspective is essential. Let's take a look. | Current State of Tesla's Business | Tesla's journey is characterized by innovation and rapid growth, but it currently faces significant challenges. | Global electric vehicle (EV) sales have slowed, impacting Tesla's operations and future plans. In the first quarter, Tesla reported a decline in revenue, issued weak guidance, and faced a challenging market environment. | In China, Tesla's second-largest market, recent sales data revealed a 7% year-over-year drop, despite sequential improvements. | Increased competition from local, lower-priced models has contributed to this slowdown. As a result, Tesla has reduced production in China and increased advertising expenditure, negatively affecting profit margins. | Tesla's vehicle deliveries fell by approximately 8.5% to 387,000 cars in the first quarter, the first decline since 2020. Despite these hurdles, Tesla remains focused on growth, industry dominance, and cost-efficiency programs. | The Vision: Tesla's Fourth Master Plan | At the event, Elon Musk hinted at Tesla's fourth Master Plan, calling it "epic." | Historically, Musk's Master Plans have outlined Tesla's strategic vision. The first Master Plan in 2006 aimed to create a high-end, low-volume car to fund the development of a medium-volume, lower-priced car. | The second Master Plan in 2016 focused on integrating energy solutions, expanding EV offerings, and advancing vehicle autonomy. | Master Plan 3, introduced last year, envisioned large-scale electrification through scaling Tesla's auto and energy businesses. | The details of Master Plan 4 are yet to be disclosed, but it is expected to emphasize AI, robotics, and hybrid computing. | Musk, during Tesla's annual shareholder meeting, suggested that Tesla's market cap could reach $5 trillion, with the humanoid robot Optimus potentially adding another $20 trillion to $25 trillion in value. | This ambitious vision aligns with Tesla's ongoing efforts in robotics and vehicle autonomy. | Bullish Wall Street Perspective | Morgan Stanley analysts foresee a strategic shift for Tesla, moving beyond just EVs. | They predict Master Plan 4 will focus on "Anything But Cars" (ABC), indicating a potential de-emphasis on Tesla's core auto business. This shift reflects Tesla's growing interest in AI and robotics and a broader technology ecosystem that includes Musk's other ventures, SpaceX and X. | Cathie Wood of Ark Investment forecasts a significant AI-driven surge for Tesla, predicting shares to reach $2,600 by 2029. | She expects Tesla to dominate the autonomous driving software market, successfully launch a robo-taxi business, and achieve substantial revenue growth, potentially reaching an enterprise value of $8.2 trillion. | Wood anticipates Tesla will achieve profits of $300 billion and revenues exceeding $1.2 trillion annually by 2029. | These ambitious projections hinge on Tesla launching a significant robo-taxi business, which could drive revenue growth and help Tesla compete with companies like Uber in the ride-sharing market. Additionally, automakers are expected to increase production by 45% annually. | Valuation First, Growth Later: A Value Investor's Perspective | Despite Musk's ambitious projections, value investors should prioritize current valuation over future growth. | Our fair value estimate, based on 12 valuation models including P/E multiples, EV/EBIT multiples, and discounted cash flow (DCF) analyses, suggests a fair value of approximately $190. This indicates a potential upside of just 4.1% from the current stock price, implying that the stock is fairly valued at present. | While Tesla's ventures into AI, robotics, and autonomous driving hold promise, they also entail substantial risks and uncertainties. | What would need to happen from here to justify a $30 Trillion valuation in the next ten years? | If interest rates hold at 4.25% (unlikely, but you can adjust as interest changes) and you use that as your assumed earnings yield, that would imply a future P/E ratio of 23.5. | That would mean $1.27 trillion of earnings by then, up from TTM earnings of $13.6 billion. That means earnings growth of 57% per year. If you assumed 20 years, it would require just over 25% growth per year. | In the age of AI, EVs, robotics, and more, anything is possible, but it's better to find 1-foot hurdles to jump over. | Conclusion | Elon Musk's vision for Tesla is revolutionary, with aspirations of reaching a $30 trillion market cap. While this ambition is inspiring, value investors must ground their expectations in reality. | Given government support, consumer demand for EVs, and Elon's ability to generate revolutionary breakthroughs through highly technical teams, the company will likely have much higher revenues in 10-20 years. | However, competition and the brutal nature of capitalism will continually attack excess margins. | Don't short the stock, but don't go YOLO either, just because of "$30 Trillion" headlines. If you're going to invest, position accordingly at something like 1-2% of your "risk" funds. | Focusing on fundamentals and current valuation before betting on future growth is crucial. Wait for a margin of safety of at least 25-50% before sizing bigger. | Tesla's innovative projects and strategic shifts could indeed transform the company and its industries. However, prudent investing requires careful assessment of risks, challenges, and realistic growth prospects. | That's all for today. Thank you for reading! | | | | | | |
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