Why Tesla Is Not A Bubble?
In recent times, I often hear the opinion that Tesla is a bubble. Usually, when people talk about the “Tesla bubble” they refer to the values of capitalization and the number of machines produced. But when you recognizing a bubble, you should consider not only these factors. Now we will look at the numbers and I will try to explain why Tesla is a growth company and not a bubble.
To begin with, we need to understand how Tesla’s product differs from other companies, such as Toyota, General Motors, Volkswagen, etc. Is such a large capitalization justified (680.96 billion)? What Tesla’s growth prospects are, whether the company is profitable or not, and how big this profit is.
Tesla has no competitors in this direction. The company offered a product that is actively exploited and offered the market the best ranges and prices. The price of Model 3 at $38k is the best value for money in the market. If we look at the earnings figures of all the companies offering alternatives, we see that their earnings are not growing. While Tesla’s revenues are skyrocketing.
When we look at Tesla’s competitors and their quarterly reports, we see them stagnating. They don’t develop the technology. Hundreds of thousands of Tesla vehicles on the road represent a huge database, each car is viewed as a separate sensor, each situation is analyzed as a separate source of information. After analyzing this information, a new or improved algorithm is created and sent as a software update to each machine. That is, when one car from the entire Tesla fleet has learned a lesson, it applies to all cars. Nobody has such technology. Other companies (Mercedes, BMW, and over 370 other companies) turn to Nvidia to ensure the autonomy of vehicle control.
We looked at profits and figured out why they are growing and will continue to grow in the future. Now we will look at the main indicators that should be considered when evaluating stocks and companies. We will see Tesla’s Gross Margin, Operating Margin, Profit Margin, ROE, P/E, etc., and compare it with General Motors and Toyota Motors.
First of all, pay attention to the indicator Gross Margin. This figure shows the percentage of total revenue that the company retains after incurred direct costs associated with the production of goods and services sold by the company. The higher the percentage, the more the company retains finance for every dollar of sales to serve other expenses. Tesla has overtaken all of its rivals.
Many people use the P/E multiplier as a measure of the number of years in which a company pays off. But actually, for investors, companies with high P/E are more attractive, while companies with low P/E can potentially go bankrupt. You may be intimidated by Tesla’s figure of 1172.67 (at the time of this writing), but here’s a prime example of how this figure will change as income increases and reinvestments in the company.
According to these historical data, it can be seen that the Price/Earnings ratio on Facebook in 2013.03.31 was 1279.00. In 2021.04.30 it is already 32.19. Only for 8 years company decrease P/E by 1246.81. But you see an even more obvious change in this ratio in the period from 2013.03.31 to 2013.06.30. Decrease in the value of the multiplier by 1170.83. P/E is often used as an estimate of expected earnings or dividend growth.
“Wall street rule of thumb — growth level (G) should be equal to P/E, that is, G = P/E, pegratio =1.”
Also, an important indicator is the indicator EPS growth past 5 years. “EPS is one measure that can serve as a proxy of a company’s financial health. If all of a company’s profits were paid out to its shareholders, EPS is the portion of a company’s net income that would be allocated to each outstanding share.” — Jean Folger. TSLA has 19.70% EPS past 5Y. GM has -6.00% and TM has 1.20%.
The numbers speak for themselves.
We can continue to look at indicators and multiples, but they have already told us the main thing: Tesla is a growth company with great growth prospects. Let’s take a look at the ARK’s Price Target for Tesla in 2025. “Last year, ARK estimated that in 2024 Tesla’s share price would hit $7,000 per share or $1,400 adjusted for its five for one stock split. Based on our updated research, we now estimate that it could approach $3,000 in 2025.” — Tasha Keeney, CFA, Analyst. I can believe this prediction. Moreover, it seems to me that Target prices will grow over time.
Let’s Recap
I think Tesla is an excellent company for long-term investments (over 10 years). Of course, your investment should be based on your trading and investment strategy. In this article, I tried to clearly show with numbers that Tesla is not a bubble, and people who think differently simply do not fully understand this issue. I will be glad if you can substantiate your opposite opinion.
Updated 03.05.2021
The day after this article was published, P/E declined by 457.51. A vivid example of how this indicator can change almost 2 times in a day.
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