Tesla stocks: growth prospects and inflated market capitalization
Tesla is a company that has been leading the electric car market for several years now and has become a symbol of the transition to environmentally friendly forms of transportation. However, despite all of its achievements, the current market capitalization of the company is unreasonably inflated, and its business growth indicators seem unrealistic.
After the publication of the report for the first quarter of 2023, the price of Tesla stocks fell by 6%, and analysts one after another began to lower their forecasts for the company. One expert even predicted that the stock price could plummet by almost 6 times, to $28.
|Q1 2023 results||Net income: $2.51 billion ($0.85 per share), Revenue: $23.33 billion, EBITDA Margin: 18.3%, Expected EBITDA Margin: 20%|
|Target stock decrease||At least 7 analysts|
|Maximum expected stock decrease||Nearly 6 times, to $28|
|Current market capitalization||Over $500 billion|
|Required revenue growth rate||28% annually until 2031|
|Expected sales volume in 2031||4.5 million electric cars per year|
|Projected operating margin in 2031||13%|
|Decrease in net income in Q1 2023||-24%|
|Expected revenue growth in the near future||20-30% annually|
|Expected revenue growth after 2025||10% annually|
|Projected operating margin after 2025||7%|
In order to meet its current market capitalization, Tesla needs to grow at an unrealistic pace. According to calculations by David Trainer, founder and CEO of investment research firm New Construct, the company’s annual revenue growth must be 28% up to 2031, with an operating margin of 13%. This is significantly higher than Toyota and other car manufacturers. In addition, Tesla must constantly expand, build new plants, and reduce capital expenditures to support its rapid production growth.
Cons of Tesla’s stocks:
- Markedly overpriced stock value;
- The need to grow at unrealistic rates to match such valuation;
- Net income decreased by 24% in Q1 2023;
- EBITDA profitability expectations not met by analysts;
- Expectation of stock prices collapsing almost 6-fold to $28.
Pros of Tesla’s stocks:
- Prospects for high business growth in the coming years;
- Potential to achieve $100 billion in net operating income by 2031;
- Opportunity to become a major player in the industry with sales volume of 4.5 million electric cars per year in the next eight years.
An optimistic forecast suggests that Tesla’s business will still grow, but not as fast as expected. The company’s revenue will increase by 20-30% annually in the coming years, followed by a slowdown to 10%. A decrease in the operating margin will also be observed.
Nevertheless, after eight years, Tesla can become one of the major players in the market, selling about 4.5 million electric cars per year. This significantly exceeds the total production volume for the past four quarters and Toyota’s sales volume for the past 12 months.
Based on the presented information and the analysis of expert David Trainer’s opinion, it can be concluded that buying Tesla stocks at this time is not a rational decision. The company is significantly overvalued on the market, and its growth must be unrealistically fast to justify such a valuation. The company’s indicators announced in the Q1 2023 report do not meet analyst expectations and have led to a decrease in stock forecasts. An optimistic forecast assumes Tesla’s business growth in the coming years, but the company’s profits will not increase as significantly as investors expect. A more realistic estimate predicts the company’s revenue to increase by 20-30% annually in the coming years, but the operating margin will decline. Therefore, buying Tesla stocks at this time is unjustified, according to many Wall Street analysts.