To Invest in Tesla Stock Take the Long-Term View

Investors in Tesla (NASDAQ:TSLA) stock have to take the long-term view to understand its value. It has risen 40% since my last article on the company on April 21 when I talked about its long-term value. That really seems to be the key to understanding the action in this stock.

Tesla Stock
Source: Tudoran Andrei /

One way to view the company’s valuation is to project out in the long-term future its car production, revenue, and eventual profits or cash flow. This seems to be the only rational way to look at the present price of Tesla stock.

For example, Seeking Alpha recently highlighted a recent Morgan Stanley report on Tesla. The analyst, Adam Jonas, based his target price on Tesla delivering 2 million units by the year 2030.

Think about that. That requires taking a view on the company’s performance a little less than 10 years from now. His valuation seems reasonable, based on the company continuously ramping up its production capabilities and growth in demand for electric vehicles.

A Long-Term View on the Tesla Stock Valuation

The point I am making is you have to have a long-term view on Tesla stock. By the way, Morgan Stanley thinks that Tesla stock is worth only $650, not $959.74, as it was on Friday, June 26. This is based on their estimate of an average $50,000 car price, 2 million units delivered, and an average EBITDA margin of 16.5%.

That works out to $100 billion in revenue and EBITDA of $16.5 billion by 2030. Tesla’s market value is $178 billion, and since it has $4.4 billion in net debt, the enterprise valuation (EV) is 182.4 billion.

Therefore, the Tesla stock EV/EBITDA ratio is just 11 times. In fact, some might think this is too low a valuation. Keep in mind, though, that this is for the performance of the company almost 10 years from now. That is how long or far out the market is willing to look at the company’s prospects.

Analysts tend to believe that the company will have to pick up more debt as it continues to build out more Gigafactories. For example, we can add in another $16.5 billion in net debt to the future EV. But the EV/EBITDA rises to just 12 times, even with this added debt. That does not seem too expensive.

Comparing That With the Present

Analysts expect Tesla to announce its Q2 deliveries this week. According to Barron’s, expectations range from 72,800 to 80,900 vehicles delivered for the quarter. The latter is the estimate from an RBC analyst. Tesla books revenue when the company delivers its cars.

That compares to 88,496 delivered in Q1 2020. In Q4 the company delivered 112,095 vehicles. But a year ago in Q2 2020, total deliveries were 95,356 cars. You can see these numbers on page 6 of Tesla’s last slide presentation.

First of all, you can see that deliveries will be down from last year. Of course, the pandemic accounts for the fall in production and deliveries.

Secondly, you can see that this is a good way off from the estimated 2 million annual deliveries implied in the Tesla stock valuation. That implies 500,000 quarterly deliveries, or over four times the highest level so far in Q4 2019.

Granted, Tesla’s Shanghai factory is not yet completely built. In addition, the Model Y crossover deliveries are not included in these numbers yet. Moreover, Tesla is building a Gigafactory in Berlin and is reported to be negotiating to build another Gigafactory in Austin, Texas.

When all these plants are running Tesla can approach the level of deliveries needed to get to 500,000 per quarter.

What to Do With Tesla Stock

Whether or not Tesla makes the expectations for deliveries in Q2 is basically irrelevant to the long-term value of Tesla stock. This is because the company is on a long-term trajectory of delivering 2 million vehicles within 10 years.

And that is what the stock’s valuation is based on these days. Keep that in mind when you look at the gyrations of the stock after it produces the delivery numbers for Q2 2020. It’s best to look at the long term valuation of the stock.

If you think the slight increase or decrease in deliveries this quarter makes a difference, put the numbers in a model for the value of the stock. Then you can see if that makes a difference to the long-term value for Tesla stock.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

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