Tesla: No Irrationality In The Current Price, Part 2 – Seeking Alpha
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A few days ago I wrote an article in which I pointed out the absence of irrationality in the current price of Tesla (NASDAQ:TSLA). Frankly, I am pleased that after the publication of quarterly reports, I have another opportunity to show that the company is absolutely adequately assessed by the market.
In my opinion, the main positive moment of the Tesla report for the 2nd quarter is not that the key results exceeded expectations (revenue at $18.76 bn vs est. $17.87 bn and EPS at $3.22 vs. est. $2.26), but in the margin dynamics. According to the latest data the company’s automotive segment gross margin hit 32.85%:
According to Saxo Group, this margin level is a historical record for the global automotive industry. This reinforces the idea that Musk was able to build a company that is fundamentally different from other automakers in terms of profitability.
The operating margin of the company exceeded 15%, against 12.07% in the previous quarter. Autopilot software sales contributed significantly to this growth. But there is a fly in the ointment here. A few days ago, an article was published on Bloomberg highlighting the problems with the software that the company provides. There is a potential risk that the regulator may slow down this direction of the company. In my opinion, it is this factor that limits the growth of the company’s price after brilliant reporting. We should probably wait until this issue is cleared up.
Further. Tesla confirms its forecast for a 50% yoy increase in vehicle deliveries:
…We plan to grow our manufacturing capacity as quickly as possible. Over a multi-year horizon, we expect to achieve 50% average annual growth in vehicle deliveries…
Tesla Q1 2022 Update
This means that the company plans to maintain exponential growth in vehicle deliveries. In other words, the acceleration of production continues despite the difficulties in the global supply chain and the lockdown in China.
In order to understand how the published data affected the company’s fundamental value, I propose to build a DCF model that will reflect the current trends in the company’s development.
When predicting company’s revenue for the next decade, I proceeded from the current expectations of analysts:
The operating margin of the company has maintained a positive trend over the past three years (last quarter data not shown on chart):
However, I don’t want to overly optimistic forecasts in the model, so I will assume that the operating margin will remain at the current level of 15%.
Here is the calculation of the Weighted Average Cost of Capital:
Some notes on the WACC calculation:
Here is the model itself:
(in high resolution)
The DCF-based target price of Tesla’s shares is ~$826 (-18%). At the same time, it should be understood that this is only a model and the result is always only a benchmark for a balanced price. Considering that the potential is below 30%, the actual result of the model is neutral.
Tesla is without a doubt a growth company that is at an early stage in its life cycle. This means that investors are concerned about only three issues regarding this company: growth, growth and again growth.
The main result of the last quarter is that the company’s growth continues both in quantitative and qualitative aspects. This is something unique given the current situation in the global economy and the complexities in supply chains. But the most interesting thing is that using the standard method of financial analysis, the company absolutely does not look overvalued.
I agree that the DCF modeling result is driven in large part by the company’s relatively positive, long-term operating margin outlook. When forecasting for the long term, it should be borne in mind that high profitability will attract competitors. But in my opinion, the current dynamics of Tesla’s development is such that even the current margin is not the limit. But only time will tell if I’m wrong.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
via Inferse.com https://www.inferse.com
May 16, 2022 at 12:11AM