Electric Vehicles, AI, And New Markets Propel Growth

Key Takeaways

• Tesla's innovation in electric vehicles and AI, despite current market challenges, positions it for future growth and increased market share.
  
• Expansion and product diversification, including a more affordable model and advancements in autonomous driving, promise to boost future revenues and margins.
  
• Tesla faces challenges from increased EV competition, product development delays, regulatory hurdles for autonomous tech, rising costs, and risks in scaling production.

Catalysts

Designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally.

• Despite short-term market challenges due to discounted competing EVs, Tesla’s continued innovation and advancements in electric vehicles and AI position it favorably for future growth, impacting revenue and market share.
  
• Record quarterly revenues and an all-time high in energy storage deployments indicate a growing demand for Tesla's energy solutions, likely boosting profits and diversifying revenue streams.
  
• The pending release of a more affordable Tesla model and large-scale infrastructure investments hint at future volume growth and market expansion, potentially improving net margins through economies of scale.
  
• Advancements in autonomous driving technology, particularly the upcoming rollout of version 12.5 of full self-driving, suggest a near-term leap in Tesla’s autonomous capabilities, promising a future increase in service-based revenues and significantly impacting earnings.
  
• Expansion efforts such as the completion of the Giga Texas expansion and the production increase for the Optimus humanoid robots indicate long-term strategic moves into new markets and products, aiming at substantially growing future revenue and brand diversification.

Assumptions

• Analysts are assuming Tesla's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.0% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $18.1 billion (and earnings per share of $5.05) by about October 2027, up from $12.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $29.9 billion in earnings, and the most bearish expecting $8.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.9x on those 2027 earnings, down from 66.5x today. This future PE is greater than the current PE for the US Auto industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.27%, as per the Simply Wall St company report.

Risks

• The increasing competition in the electric vehicle market, with new entrants discounting their EVs substantially, could pressure Tesla's market share and margins if these trends persist over the long term.
  
• The announcement of further delaying the Robotaxi product unveil reflects challenges in product development and execution, which could delay revenue generation from new products and affect the company's growth projections.
  
• The reliance on continuous advancements in full self-driving (FSD) technology and the eventual transition to unsupervised full self-driving may face regulatory hurdles or technological setbacks, impacting Tesla's ability to realize autonomous vehicle-related revenue streams.
  
• The company is facing pressure from high material costs and tariffs, which, despite efforts to mitigate, may continue to impact the cost structure and ultimately the profitability of Tesla's vehicles.
  
• Tesla's plans for expanding its product lineup and scaling production (e.g., Cybertruck, Optimus robot) require substantial capital expenditure and face execution risks, which could affect the company's cash flow and profitability if there are delays or cost overruns.

Valuation

• The analysts have a consensus price target of $208.27 for Tesla based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $310.0, and the most bearish reporting a price target of just $85.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $144.6 billion, earnings will come to $18.1 billion, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 9.3%.
• Given the current share price of $258.02, the analyst's price target of $208.27 is 23.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.