Summary:

  • Tesla is trading at a P/S ratio of 13.2x, which may not seem too high for some investors.
  • Revenue is expected to continue to grow at 20.3% annually and 27% in fiscal 2022.
  • In addition to the fundamentals, investors willing to sell short will need to gauge whether retailer enthusiasm for the stock will wane.

In this analysis, we will look at some of the aspects that the market may have adapted when pricing Tesla, Inc. (NASDAQ: TSLA) and explore why the stock can maintain its current levels. Even though the fundamentals may not reflect the current valuation.

Traditionally, we look for cash flows attributable to investors when assessing the value of a company. However, when companies are in a high growth phase, investors may be caught up in sales rather than profits. The reason is that we don’t really know when growth will slow down, so lowering the revenue structure may not make sense at that time. Thus, investors can monitor the price-to-sales ratio, instead of the price-to-earnings ratio.

The price/sales ratio is not that unreasonable

Here we come to our first main point. Tesla’s price-to-sales ratio isn’t too bad. The company is trading at 13.2x compared to its historical ratio of 2x to 8x since 2016. However, analysts still expect sales growth of 20.3% for the next few years. This means that it would take about 3 years for the P/S to approach the industry average ratio of 8x. This three-year premium is probably something enthusiastic investors might be willing to hold onto, unless the economic upheaval is so severe that it alters their investment approaches.

We can see that Tesla isn’t too far off from the industry distribution in the chart below:

Check out our latest analysis for Tesla

Global Automotive Industry Price-to-Sales Ratio Distribution, September 27, 2022

US auto industry keeps investors excited

Over the past 5 years, the average selling price for the US auto industry was 1.7x. However, things changed in 2020 and the P/S ratio jumped to 3x, 4x in 2021 and finally back to 3x. Investors can use historic rates as an argument that the ratio will return to historic levels, but this should be taken in conjunction with changes to the auto industry. Specifically, many governments are passing laws that encourage electric vehicles, and some investors are betting on the industry’s capacity for software and hardware innovation. Although we are heading towards an economic crisis, there is a good chance that the West will continue to support electric vehicles in the future and that Tesla, along with its competitors, will benefit from tax credits and other subsidies. Additionally, many investors have embraced the idea that the market is close to fair value (has bottomed out), implying an expectation of a rally in the future – While this may be wrong, it makes the short selling the security more difficult.

From a bird’s eye view, here’s how the industry has changed on a price/sales basis. Note that the previous chart depicted the global industry, while this one focuses on the United States:

US auto industry price-to-sales ratio timeline, September 27, 2022

Although it may look like a “bubble” to some investors, it is important to keep in mind that the trend may not pull back when investors think it should. In fact, bubbles have a way of disappointing the mainstream narrative – which currently seems to be that “Tesla is shorts”. Although it may seem like a contrary position, it may be the consensus.

The current assumption is that Tesla will continue to grow

Since we’re analyzing Tesla, it makes sense to look at its fundamentals from the perspective of someone with a vested interest in the company. We don’t try to be objective, rather we assess why investors might be willing to hold or buy more stocks in a downturn.

A dedicated investor base

The first thing to keep in mind is that leadership is great at managing investor expectations and giving the company more time. A breakdown of Tesla’s ownership structure reveals a stock resilience factor. It appears that 16.4% of the shares are held by insiders, while 37.1% are held by retail investors. In typical companies, a large portion held by retail investors may signal that institutions have abandoned a company. However, in Tesla’s case, shareholders are more likely to still be enthusiastic and perhaps continue to buy the stock.

Who would sell a growing and profitable business

As long as the company continues to operate, investors seem unlikely to abandon it. It’s entirely possible that Tesla will hit a wall of profitability and growth, but who’s to say when that will happen? In the next quarter, in a year, in the next 5 years? Investors who believe they know when the company will slow down may be in a good position to make a short prediction, but hoping that may not be enough.

Over the past 12 months, revenue was $17 billion, about what analysts expected. Tesla surprised by making a (statutory) profit of $0.65 per share, 30% more than expected. In previous earnings calls, Musk has indicated that the company is expected to grow revenue by around 30% over the next few years. Analysts don’t quite agree, but seem to be expecting growth close to 27% for 2022.

In the chart below, we can see how analysts expect the company to perform in the future:

earnings-and-revenue-growth
NasdaqGS: TSLA Earnings and Revenue Growth September 27, 2022

Statutory earnings per share are also expected to climb 22% to $3.69. We can see that the company should continue to grow and stay in line with some of the highest US market cap stocks.

It’s also worth noting that analysts reconfirmed their price target of US$309, which has been relatively stable for Tesla over the past year, and maintains current levels despite some of the production facilities being disrupted. You can get our price target history for Tesla to better understand why the company has maintained current levels.

Conclusion

Markets have their own mind, and for a stock to go down, investors have to change their minds. Although the fundamentals may enlighten them in the process, they may not matter in the short term.

In this analysis, we explored the bullish outlook of Tesla analysts and investors. While fundamentals are unlikely to reflect current market valuation, it appears there are a number of reasons why investors are willing to pay the futures premium for the stock, and bearish investors will have to be right on the slowdown in future fundamentals. as well as a change in outlook on the company from investors who are willing to buy the stock in a downturn.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

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