Tesla (NASDAQ:TSLA) is one out of six companies to ever surpass a market capitalization of $1 trillion. TSLA stock has gained over 17,000% since inception in the hard-to-survive automobile industry. The company stands behind a compelling and critical mission statement: to “accelerate the world’s transition to sustainable energy.”
Tesla’s market cap is more than the combined value of top automakers globally including Toyota (NYSE:TM), Volkswagen (OTCMKTS:VWAGY), Daimler (OTCMKTS:DMLRY), Ford (NYSE:F), General Motors (NYSE:GM) and Honda Motor Co. (NYSE:HMC).
Solving an International Problem
Tesla CEO Elon Musk has been in the midst of controversies and people love to doubt him, especially short sellers. The electric vehicle (EV) maker is leading the transition of the world away from vehicles with carbon emissions and toward sustainable energy. The company is said to be part of the solution of a global problem. Climate change has been arguably the central discussion point for world leaders and policy makers recently.
Historically, Tesla had struggled to meet car production numbers and delivery deadlines, causing stock performance volatility and viability doubts. Tesla currently operates two giga-factories, one in Fremont and one in Shanghai.
Yet, the Texas company is getting ready to open two new sites, in Berlin and Austin. Tesla recently announced that it could reach its 50% of increased output per annum with just the existing factories.
The business has also faced multiple setbacks and skeptics with supply chain issues and the most recent recalls.
TSLA Stock Fundamentals
I will start with the notion that the stock market is often an irrational monetary marketplace. Participants with dissimilar agendas, investment principles and time horizons use their financial resources to show their vote of confidence (or non-confidence). Often, prices and valuations don’t make much sense.
TSLA stock presented its fourth-quarter earnings at the Jan. 26, 2022, presentation and the figures were great, as they beat Wall Street expectations. The manufacturer announced they exceeded their year-on-year (YoY), 50% target increase in car delivery. Tesla delivered roughly 940,000 cars in 2021 vs. 500,000 in 2020 and despite that, TSLA stock still plummeted almost 12% from $937 to $829 in a day.
The reason for the stock drop is that Tesla will not be producing new model vehicles in 2022 and they are not working on a $25,000 electric car. These two factors, along with less significant factors such as management compensation and (seasonal) chip shortages, have led to a stock tumble in late January.
For Q4, 2021 total revenues grew 65% YoY to an all-time high of $17.7 billion, mainly driven by vehicle delivery growth. Tesla reported increased earnings per share (EPS) of $2.05 vs $1.44 from the previous quarter. Operating cash flow, free cash flow (FCF), net income and gross margin were all significantly up as well. On a YoY and on a quarterly basis, the financial results were staggering.
With a strong balance sheet and ample liquidity, Tesla is ready to invest in product development and expansion. Cybertruck and Model Y industrialization is progressing and the company is continually innovating. The goal is to reduce manufacturing costs, increase margins and drive software profits up in combination with hardware profits. Tesla has a few other ongoing projects such as humanoid robot development, robo taxis, a new plant for battery production and improving driver assistance technology amongst others.
But when the auto giant solves the complex problem of full self driving (FSD), Tesla will create and conquer a whole new market, and the stock potential will be enormous. It will be a turning point, when an FSD car is able to drive better than a human and when that can be statistically proven. A FSD car unlocks the opportunity for drivers to use driving time for doing more productive or recreational tasks.
Tesla is now at the lifecycle stage where demand exceeds supply while the company has a solid proof of concept. Tesla stock does not carry the start-up risk anymore and is moving from a growth towards a maturing company with a gigantic potential upside. It is more of a “When rather than If” it hits next-level highs.
TSLA Stock Price Target
The global demand for Tesla EV cars is evident. TSLA stock has managed to operate with an average gross margin of 27.4% in the latest quarter. Tesla demonstrated its capabilities and the expertise to scale and produce through giga Shanghai.
Currently TSLA stock is trading at $922, far from the $1,229 high of November 2021. The recent stock price drop is an opportunity to enter into a good valuation with great upside.
Taking into consideration: a) two new giga-factories, b) continued refinement of their production line, c) strong demand and d) new products in the pipeline, I can see Tesla reaching Toyota car selling numbers in a decade from now. That is roughly 9 million-10 million cars. And by using a moderate 22x EBITDA, TSLA stock can modestly hit the $2 trillion market cap.
On the date of publication, Jonathan Tang held a LONG position in TSLA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jonathan Tang has gained extensive experience in the financial services industry in London. He has completed valuable projects for companies such as Bloomberg, London Stock Exchange Group and FactSet. He holds a master’s degree in Investment & Risk Finance and has completed an MBA course at the London School of Economics. Jonathan has a passion for fintechs that democratize investing, stock market and public equities, ETFs, start-ups and real estate.