The idea behind that prediction is that Tesla is not a scam — it’s just extremely overvalued, gaining about 750% in the past year. Eventually, the company’s actual growth will likely catch up to its stock price. But investors could be disappointed by how long that realignment may take.
In a new research note, Needham analyst Rajvindra Gill says he can’t justify the current Tesla stock valuation, even by looking 10 years into the future.
Tesla Stock Has Outgrown Its Business
Many Tesla bulls I talk to seem to approach Tesla (and CEO Elon Musk) with more blind faith than objective analysis. On the flipside, the bears alleging that Tesla is a fraud are even more unhinged.
In reality, Tesla is a great growth company. And that great company just happens to have a stock price that is absolutely ridiculous.
This phenomenon is not unique to Tesla. I’ve previously compared the company to Microsoft (NASDAQ:MSFT) during the height of the dot-com bubble back in 2000. From 2000 to 2015, Microsoft reported impressive revenue growth. Yet it took more than 15 years for its business to grow into its absurd bubble valuation.
Gill doesn’t doubt Tesla’s growth story even a little bit. In fact, he is calling for 21% compound annual revenue growth for the company through 2029. In a Needham analyst note from Oct. 12, he says:
“Based on our estimates, this would imply Tesla becomes the #1 car manufacturer by units sold at approximately 4 million cares (based on today’s levels) at ~$41k blended ASP (approx $35k equivalent today).”
Needham is also projecting 35% CAGR in free cash flow for Tesla over the next decade. But Gill still can’t find the upside for Tesla stock.
“Our 2029 base case implies a share price of $365 or 14% downside at current levels when discounting 10-years of FCF back to today’s levels,” he concludes.
Understandably, Needham has an “underperform” rating for Tesla stock.
Comparing Apples and Teslas
Yes, Tesla has an excellent long-term growth opportunity. But the 2020 electric vehicle bubble has made the company untouchable as an investment.
Tesla stock investors hate to compare the stock to other auto stocks. Fine. They say the company is closer to Apple (NASDAQ:AAPL), which started by selling hardware and transitioned its growth story to a services model. Fine. Let’s look back at Apple’s history.
In the past 20 years, Apple’s revenue has gone up more than 4,000%. That’s some pretty crazy long-term growth. During that 20-year stretch, Apple stock’s single best year was an over 200% gain back in 2004. Tesla is up 772% in the past year alone. I hate to break it to Tesla investors, but Apple reported 39% revenue growth in 2004. Tesla’s revenue growth in the last four quarters has been 3%.
In fact, Gill points out that pretty much the only thing that has changed about the company’s profile in the past year has been its share price. He points out that the cost to buy Tesla increased by 386% from July 2019 to March 2020. During that stretch, consensus analyst estimates for 2021 Tesla revenue actually dropped by 13%.
How To Play It
I wish all the best for Elon Musk and Tesla stock investors. The company will likely gain a significant share of the global auto market over the next decade by putting up some world-class growth numbers. But its stock price will also lag the S&P 500 during that period.
Share price can become detached from reality in the short-term. Just ask investors who bought Microsoft shares back in 2000. However, fundamentals always have a way of catching up to a stock — even if it takes a while.
As Laura Gonzalez, associate professor of finance at California State University, Long Beach, wrote in an email to InvestorPlace:
“Tesla has overcome numerous obstacles and there is demand for alternatives to traditional automobiles. However, in order to maintain a high price-to-book ratio charismatic leadership needs to be paired with expectations of stability based on predictable behavior. ”
It’s great that so many young investors are learning about stocks by investing in the brands they love. I just hope that they don’t miss out on the 10 to 15 years of gains by buying Tesla stock at a bubble valuation.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.