Hi, I'm Jimmy in this video I'm going to walk through my analysis of Tesla ticker symbol
TSLA. The goal of this video is to look at the basics of Tesla's business and try to
determine what Tesla's stock could be worth today. And then ideally we want to see if
it makes sense for us to try to buy Tesla stock at the current price. Okay. Let's jump
right in. So how about we start with Tesla's revenue? And as we could see here. Well, they've
done a great job of growing revenue since 2012. Those green bars, those are analyst
estimates. And it seems that analysts are expecting for Tesla's revenue to continue
to increase over the next couple of years. Now, we may notice that in 2019 it is an estimate,
but that's only because the fourth quarter of 2019 is not on the books yet. But this
part right here is read part. Well, that's the amount that is already on the books. So
already they've booked over 17 billion dollars in revenue through the first three quarters.
That would mean that, according to analyst estimates, they have to book somewhere in
the area of 7 billion dollars in revenue for the fourth quarter, which is very possible
since they posted over 6 billion dollars in the past two quarters. Okay. Now, I'm sure
that most of us already knew that Tesla was growing at an awesome rate, but clearly their
near-term issue is going to be profits. So this is a chart of Tesla's profit going back
to 2012. And once again, we can see that 2019 estimates, according to analysts, are supposed
to have Tesla showing a slight loss in the profit department. Now, this is interesting
and all, but I think we can get a clearer picture if we switch this over to quarterly
numbers, because once we go to quarterly or we can see that in 2019, the first quarter,
there was a big loss. Second quarter was a bit better, although still a loss. But then
in the third quarter, we saw a profit just like we saw back in the third quarter of 2018.
Now in Q4 of 2018, Tesla also saw a profit, just like analysts are expecting for it to
happen in Q4 of 2019. But personally, I think the key is Q1. It's the first quarter of 2020.
Sure, they need the next quarter to be profitable. But if Tesla could stay profitable going into
2020, well, that would be their first profitable first quarter. And I think the Tesla's stock
is likely to react quite nicely to that news. Okay. Now, regarding Tesla's business in general,
before we try to value Tesla stock, I think that it's important to point out that 2019
has been the year of the Model 3. The good part is that this car is much more affordable
than many of Tesla's other cars. I think they priced it starting somewhere in the mid 30s
or mid 30 thousand dollar range. The negative side to creating a lower priced car like this
is that generally what a company would end up with is smaller profit margins and that
could ultimately hurt Tesla's stock. But when we look at the number of Model 3 sold on a
quarterly basis over the past couple of years, well, we can see that they are rapidly increasing
the number of model freeze that they're selling. And when we add gross profit margins to this
chart. Well, now we can see that although gross profit margins did start dropping in
the third quarter of 2018, they didn't fall below the first quarter of 2018. And it looks
like they're starting to swing higher. I would've expected a much larger drop off in this. Now,
this means only one thing, and that is that Tesla is cutting costs and this is likely
a good thing for Tesla stock. And this brings me to some good and bad things for us to consider
when looking at Tesla stock. First off, the bad. So the bad is over the past 12 months,
Tesla has produced about 350000 cars. And to put that in perspective, last year, while
GM produced about 8 million vehicles, both wagon produced more than 10 million vehicles.
So in an industry that has historically had a very high barrier to entry, well, the major
players in the industry have big economies of scale compared to a company like Tesla
who is still quite small compared to how many cars the other companies are producing. But
the other side of that is that the future of automobiles is electric vehicles and Tesla
is already there. So essentially Tesla is the future of cars. Now, I'm not saying that
Tesla is a shoo in for being successful. In fact, the first gasoline producer in the United
States was created by the I believe their name was the Dairy Brothers. And they sold
their car at that time for a bit over a thousand dollars. But about 20 or 30 years later, well,
Ford created the Model T selling that car for about three hundred dollars. So lowing
lowering the cost is going to be very important to Tesla's overall success as far as mass
adoption goes. Because whether or not we like it thirty thousand dollar or mid thirty thousand
dollar price range for the Model 3 is simply too expensive for many, many people. And Elon
Musk has stated that he wants Tesla to be widely adopted. So the key to that is going
to be getting the price down, which becomes very possible with one of their other key
advantages, and that's their battery. Tesla has a superior battery so they can continue
in theory to produce or to lower the costs of the production costs of their cars, which
would allow for a wider and wider adoption. They have right now they have Gigafactory
in Shanghai, which is already producing cars on a trial basis. And they're also putting
up giga factories in different spots in Europe. And at the end of the day. Once they have
a larger economies of scale. It's possible that Tesla could at least remain profitable
and ideally continue to grow profitability at a fairly rapid pace. And this brings us
to trying to value Tesla stock today. Now, any time I want to come up with a fair value
of an unprofitable company on an annual basis, I know that some of the quarterly numbers
have been profitable. But since we got to use annual numbers for that, it could be somewhat
tricky. That being said, I'm actually going to try to use a price to earnings ratio, but
since we can't use 20 19 because 20 19 earnings aren't going to be profitable. Well, I think
it makes sense for us to look at some assumptions that analysts are making and then try to use
20 22 estimates to see if we can come up with what the fair value of Tesla's stock might
be today. So we're gonna assume that Tesla goes profitable, they stay profitable, and
this is what their earnings per share could look like if we believe analyst estimate Caesar
as far out as I could find, according to analysts estimates. And according to those estimates,
they're expecting a profitability in 2022 of seventeen dollars and 20 cents per share.
So now our question is what multiple which P E multiple is appropriate to use on twenty
twenty two numbers? Now, right now, the S&P 500 is trading at a forward PE of about nineteen
X of 40 is when you take the next twelve months of earnings. So if we were to switch over
to a timeline here, let's imagine that we believe that Tesla is going to trade at a
slight premium to the market. Let's say we think that they're going to trade at that
time at a 20 x multiple. So 20 times profits of the next year, which means that Tesla's
stock would be worth about three hundred and forty four dollars per share. But the key
to this is that's how much it would be worth at the start of 2022. Since our assumption
is 17 20 in the seventy dollars and 20 cents they earn through 2022, what is it worth at
the start of that? Three hundred forty four dollars. If we assume that they're trading
at a multiple of 20 times profit, 20 times profits. But now what do we think this is
worth today in order to do that? Well, what we need to do is we need to discount our three
hundred forty four dollars per share by two time periods to account for the two year gap
between where we are now and are 20, 20 to estimates. Now, let's assume that we have
a required rate of return of 8 percent per year where we divide our three hundred forty
four dollars by one point 0 8. The 0 8 represents our 8 percent required rate of return. But
don't forget to raise that to the power of 2, which represents the two time periods.
And we do that math. We end up with a fair value at the start of 2020 of two hundred
ninety five dollars per share. So given the test is currently trading at about three hundred
thirty dollars per share right now. Well, for me it seems a Tesla stock is slightly
overvalued compared to our calculation of fair value. And it's important to point out
we wouldn't even want to buy Tesla stock at two hundred ninety five dollars per share.
We want to buy it at some discount to that calculation, because that calculation assumes
we will get 8 percent per year. And it assumes the 1720 will be at least close to accurate
and that Tesla's stock will be trading for 20 times next year's earnings. There's a lot
of assumptions in there. So generally we want to build a little buffer into where we actually
buy it. So we would be somewhere less than the two hundred ninety five. Dollars per share.
Now, if you're curious to learn more about when to buy a stock. Well, I actually did
a video that focuses on that exact topic and that could be a good next video to watch.
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