Tesla‘s (NASDAQ:TSLA) stock performance over the last decade has been nothing short of exceptional. Shares are up almost 23,000% in the last 10 years alone, making it one of the top-performing stocks in the market during that timespan.
he company has scaled out its electric vehicle business, sports a market cap north of $1 trillion, and CEO Elon Musk is now the richest man in the world. Everything has come up in favor of Tesla recently. But for owners of the stock, the future does not look nearly as bright.
Growth has been solid
Let’s start with what Tesla has done with its business over the last five years. It recently posted record car deliveries of 936,000 in 2021, up from a measly 30,000 in 2017.
Revenue has followed suit. Trailing 12-month sales are up 448% in the last five years, as Tesla has scaled its manufacturing business around the globe. What’s more, it has recently started to generate steady profits, putting up $4.45 billion in operating income over the last 12 months.
The company should do over $50 billion in sales in 2021, and analysts expect revenue to get close to $100 billion in 2023.
So why is Tesla stock to buy but also avoid in 2022…
To BUY…..
January’s stock market action provided a white-knuckle ride for most. Of course, the wild action comes against a backdrop of a tightening Fed and what Wedbush’ Daniel Ives terms a “valuation scrutinized market,” which has especially impacted the growth space. Often cited as the poster boy for overvalued stocks, Tesla (TSLA) stock has also been under “considerable pressure.”
However, with the EV leader about to report Q4 earnings on Wednesday after the close (Jan 26), and demand currently outstripping supply by roughly 30% globally according to Ives’ estimates, the analyst believes the “emerging fundamental story at Tesla will be back in focus.”
As Tesla has already reported Q4 deliveries, the Street has some idea of what’s in store. The company put in a “robust” performance in the quarter, which despite the global chip shortages’ impact on many of its peers saw Tesla beat the Street’s unit forecasts by 16%.
As for the headline numbers, the 5-star analyst believes the Street’s estimates for Q4 of $16.3 billion in revenue and EPS of $2.26 are “very beatable.”
With 2021 out of the way, all focus will turn to the company’s outlook for deliveries, the “overall growth/profitability trajectory for 2022 and beyond,” the chip shortage headwinds and Giga Austin/Berlin launch dates.
With Tesla’s “high-class problem” of demand outstripping supply resulting in ~5-6 month delays in some parts of the world, the Giga openings will be key to alleviating these issues.
Pre-production is already underway at the Austin facility and pending resolution of Europe logistics issues, Berlin should open soon too. With these solving the global bottlenecks of production, Ives believes that by the end of 2022 Tesla’s capacity will increase from roughly 1 million today to ~2 million units annually.
To this end, Ives reiterated an Outperform (i.e., Buy) rating along with a $1,400 price target. Should the target be met, investors are looking at upside of 52% from current levels
BUT…..TO AVOID
Two reasons: the difficulty of manufacturing and the expectations embedded in the stock.
Manufacturing is a difficult business
Bending steel is difficult. Building and selling cars is difficult, and it costs a lot of money. Tesla (a car manufacturer) is not immune to these costs, and they will make it difficult for the company to return cash to shareholders over the long term — which is how you accrue value as an owner of the stock. For example, over the last 12 months, Tesla has spent $7.3 billion on capital expenditures, which is only slightly lower than the $9.9 billion it generated in cash flow from operations.
These numbers come out to a free cash flow of only $2.6 billion over the past 12 months. At a market cap of $1.05 trillion, that is a price-to-free-cash-flow (P/FCF) over 400. Even worse, Tesla has only generated this “free cash flow” because it has grown its accounts payable and accrued liabilities by $2.7 billion this year. This is money Tesla will have to pay to suppliers and employees eventually, making the $2.6 billion in cash it generated unavailable to return to shareholders.
You might ask: Won’t capex decrease once Tesla is done expanding its business? This is not likely. Toyota (NYSE:TM), the largest car manufacturer in the world, spent almost $35 billion on capital expenditures over the last 12 months, and it is growing capacity at a much slower rate than Tesla. If Tesla starts delivering more than 10 million vehicles a year (as Toyota did in 2019), it will have a perpetual need for capital investment, which will limit the amount of true free cash flow available to pay out to shareholders.
Expectations are much too high
Given the difficult nature of an automotive manufacturing business, most of the sector’s stocks trade at dirt-cheap earnings multiples. This will likely be true of Tesla at some point. Let’s look at Toyota again as an example. The company, which did $281 billion in revenue over the past 12 months, generated $28.2 billion in net income. It has a market cap of $289 billion, or right around a price-to-earnings ratio of 10. It is so low because investors in the company understand that it will be difficult for excess cash to be paid out to them relative to its earning power.
On the other hand, Tesla sports a market cap of $1.056 trillion and has a trailing net income of $3.47 billion. Could Tesla get to $28.2 billion in annual net income someday? Maybe. But as investors, you should understand that with a market cap more than three times the size of Toyota’s, this is already priced into the stock.
If you own Tesla right now, you should have a thesis on why it will be worth more than $1 trillion in the future, and likely $2 trillion a decade from now if you desire a decent compounded annual return. You might argue that Tesla is setting itself up to do that with autonomous driving, battery technology, and solar panels.
However, these are all either small and capital-intensive businesses (solar and batteries) or speculative business plans with no line of sight to becoming commercially viable (autonomous driving). Will these segments help Tesla achieve positive returns over the next decade when it already has a market cap pricing in the dominance of the majority of the automotive sector?
Tesla’s market cap is much too high relative to the opportunity set in front of it and its current financial profile.
For that reason, it is the one stock I’d avoid buying in 2022.