Is “Elon Musk Tesla Stock” going to fall in this recession or it will continue growing? In this blog, I will discuss “Elon Musk Tesla Stock”. The reason behind its growth and the future of tesla stock.
Introduction
Recently an acquaintance on Twitter the AI investor pulled his followers asking, how big is Tesla in your portfolio? The majority responded that it was between 50 and 100 plus 36 percent responding hundred percent.
I wonder if you truly know what the upside potential of Tesla is. Today we’re going to talk about the upside potential as well as more conservatively baked scenarios.
Where do I think Tesla Stock Can go?
So say where does Tesla go from here? What’s sort of the downside, where can it go?
I think Tesla stock can go from here, well you know the AI investor called out his own model saying hey I think this stock goes nearly 5x in the next five years and that doesn’t even include some optionality like Robo taxi and Optimus.
I think it is worthwhile to explore okay what is that model that gets you there and is it reasonable, is it conservative, is that the type of Journey that you want to go on?
So let’s understand the model let’s understand well what’s going on with Tesla in the first place. Well looking at Tesla, I mean look their third-quarter results were exceptional you’re talking about 55 growth in automotive revenues.
You have industry-leading profitability you know High Teen’s profit margins I mean these are exceptional results generating real free cash flow several billion dollars some free cash flow in the quarter.
I mean this is exceptional what you’re looking at here and this is despite the fact that they are facing very real challenges that they called out in the quarter talk about higher raw material costs commodity challenges Logistics warranty.
You know and shipping costs also had an impact from the higher US dollar impacting their revenues to the tune of 250 million. So despite these challenges and the cost of ramping up production in their Giga factory Tech Texas and Berlin you know looking at these challenges despite them they still managed to post strong profitability and still manage to grow 56 total revenue.
Market share of Tesla Stock
That is just exceptional despite those challenges and that’s what you want to see with the business you want to see someone that says hey you know I’m going to take these challenges I’m going to chew them up.
I’m gonna spit them out and they’re just gonna keep moving forward that’s what you want to see with an operator and executor and then this is also what you want to see you want to see that they’re taking market share.
The auto industry is not growing 50 plus folks you know and so if you’re growing 50 that means you’re rapidly taking market share and this is a company that spends just a couple percent on sales General and admin expenses.
so they’re not spending that much on sales and marketing and they’re still taking market share because people love the products you know currently they’re around two percent of the US market. That’s what we’re excuse me around three percent plus of the US market around two percent in
Europe and China so you’re talking about a multi-year Tailwind here if they’re able to keep taking market share that’s the question of like hey this is a big Market could this be let’s say you know 10 to 20 over time?
If they really continue growing and really resonating with the general public and if that you know wasn’t exciting enough their energy storage segment is also growing you know over 60 percent in terms of deployments in the most recent quarter which was a record quarter for deployment so looking at this business that’s also just running.
Full Throttle talk about the demand for our storage products remaining in excess of our ability to supply and they’re ramping up production.
So this is another incredible growth story that you’re looking at with Tesla and so what does management expect in the long-term well they’re expecting not only exceptional growth talking about over a multi-year horizon expecting to achieve 50 average annual growth in vehicle deliveries.
I mean that that is something special you know if it no matter what happens to the average selling price maybe it goes down maybe it goes up.
If you’re able to deliver 50 annual vehicle deliveries you know that’s going to translate into exceptional growth uh in terms of Revenue and currently Automotive revenue is the vast majority of the revenue.
But it gets even better if Management’s ability to execute it. Where they say Hey look yeah we have these Hardware related profits but we expect them to be accompanied by an acceleration of software-related profits and that really codes for saying hey we expect that profits to grow even faster than potential Revenue.
Because if you’re talking about let’s say software-driven Revenue, something like you know full self-driving FSD or maybe it’s you know you tie it to some sort of insurance product. Something like that when you’re looking at software-related Revenue those is much much higher margins.
You know Robo taxi or something like that you know so if you’re looking at something like. If you’re looking at much higher margins then the growth rate in profitability could be even faster.
The volume growth that they’re looking at Vehicles now the question is how much of a musk discount should you get. Just because you know he’s obviously an eccentric billionaire is it possible he’s sort of overreaching?
Here for what the possibilities are I mean look it’s certainly very exciting to think about and once again you go back to the AI investor and he’s saying look you factor in you know average selling prices going up with you know the semi and cyber trucks that’ll come on over the next few years.
You have full self-driving you know you factor that in you factor in their energy business growing energy storage and that’s how he’s getting to this you know the 5x upside over the next five years and we’ll I’ll call out his model in just a bit but the question is like is that really should you as an investor should say.
I think is going to happen with Tesla stock well first if you’re looking to take charge of your investment Journey consider unrivaledinvesting.com for compelling investment ideas real-time portfolio updates and our exclusive.
Discord server available for annual subscribers in full disclosure this is not Financial advice so look here’s the model from the AI investor that you know.
I called out on Twitter so this is what he publicly post is what AI investors publicly posted and you know clearly there are several hyper-growth drivers and I’m not going to get into the Nitty Gritty of this model.
Because there are different things you can agree or disagree on like the share count is a bit different than what I’m using which is the fully diluted account but there are clearly several vectors here in very positive directions.
We’re talking about here with you know getting full self-driving you know which will be a very high margin long term this sort of software Revenue could be just a huge driver and insurance you know if you have let’s say insights into the insuring.
3rd quarter result of Tesla stock
Tesla vehicles that other insurers won’t have and you can price things better you should win over time and of course, continue the market share grab and electric and electronic electric vehicle market so there are clearly a lot of growth drivers.
You know that can get there and he’s all you know the AI investors also assume a little bit of a higher PE multiple than I’m personally doing around you know 34 30 times but the question is okay so what am I personally you know considering.
I’m a little bit more of a conservative investor but I do you know I do have a range of Investments that I consider in my diversifying growth portfolio the reality is it’s not like this is just Pie in the Sky folks.
I mean look at the third quarter results and once again there are data points suggesting some of these growth trajectories might be possible.
I mean you look at services and other Revenue that is growing even faster than their Automotive Sales Automotive Sales grew 56 percent Services another group 84 it’s smaller but that includes non-warranty.
After-sale vehicle services paid for supercharging so the more people using it, the more people paying for the supercharging. Sale of used vehicles retail merchandise vehicle insurance Revenue.
So there are some data points suggesting that type of incredible growth going forward is possible. When you start seeing these line items, I would like to see additional detail.
Let’s say about FSD in the future the full self-driving software you know that people are paying for. I’m very curious if they’ll start breaking that out you know in the future. But when I think about my own personal hypothetical valuation framework.
I think it’s important to recognize first you know Tesla stock can go way higher way lower than any person’s framework.
Because one is execution does the team the Tesla team execute and two what is sentiment looking like you know and you can also have technical aspects you know short-term things where it’s like hey
If you have several billion dollars of stock being sold that can you know compress you know push down the stock price in a short term you know where it might just Rebound in the coming weeks or months as the fundamentals take over so those are different data points to consider this is my range?
I’m considering it one is I’m assuming profitability is slightly higher than where they are now they’re currently around the High Teens I’m assuming they get to 20 to 25 percent longer term.
I’m giving them some credit that they’re able to get higher and higher margin software Revenue this could be lowballing it if that becomes a dramatic part of their business but let’s see like that’s where.
I’m at as an investor I’m a wait and see let’s see the data points play out they’re currently growing around 57 58 this year so that’s what I’m assuming they do for 2022 and then what’s the growth rate?
over the next five years so someone that wants to give Elon Musk full credit they’d say hey let’s assume around 50 I’m more of a conservative investor I’m going to say hey let’s pencil out 25 to 35 percent annualized over the next five years either way.
I mean this is exceptional growth this means they’re still taking market share I’m also going to assume a much more conservative earnings multiple.
Because at the end of the day this is a large purchase and at this point, the majority of the revenue comes from effectively a one-time purchase where someone’s buying a car and they’re all.
You know they’re saying hey I love it and hopefully, I’m going to be using it for the next 10 years.
So there is this sort of cyclical aspect to it if you have a tougher economy maybe you don’t grow as quickly and that is a data point to consider.
So that is part of the reason why I’m assuming 15 to 25 times earnings multiple we’ll see maybe that’s too low we’ll see.
But it is interesting to point out and maybe from a conservative perspective that you know I’m effectively saying hey if you’re growing at half the rate that musk calls out and you have a 15 times earnings multiple.
You’re effectively flat over the next five years assuming they’re able to get to 20 profit margins that are kind of interesting you know that’s pretty interesting.
Now on the flip side you know I’m saying 35 growth 25 times earnings multiple 20 25 profit margin. so much higher profit margins than where they currently are and still a discount.
What musk is talking about and a discount to where it currently trades you know because it currently trades effectively around 50 times earnings. So I’m saying hey the earnings multiple comes in in half as well well in that scenario.
You’re talking about 200 upsides so I think it’s a situation like this you know looking at Tesla and when I look at Tesla this is not like the specs that. I’ve previously called out as complete dog poop.
Where I’m like hey this is ridiculous, you know like a year ago or so where I said it’s more likely that I I think I said it’s more likely.
I joined the Lakers then Hylton delivers their results and as the stock got absolutely obliterated at the time everyone was like Daniel you know.
you’re ridiculous this is not that sort of situation because you have someone that has a real product that’s delivering that’s taking market share.
So the real question that you want to ask yourself as you’re looking at Tesla as you’re considering your own investment Journey.
Because you want to ask yourself what type of investor are you. Now over my shoulder, I have a copy of the margin of safety and that comes from the concept that Ben Graham, taught about which was this idea of like hey when you’re looking at a stock.
Do you want to assume that they deliver on everything that they say that they’re gonna do or do you want to take a hefty discount to that and so that’s the approach that I personally want to follow?
I personally want to follow the saying hey let’s assume this doesn’t work out let’s assume we don’t deliver on that growth and let’s assume you know the sentiment also gets weaker and I don’t look at Tesla I’m saying to myself.
I don’t have like a Smoking Gun that says this is gonna go down a lot but there is enough sort of gray clouds in the sky that gives me pause especially when.
I see investors that are very excited the folks that say Hey I’m 100 plus in Tesla it makes it gives me pause because it makes me think these are the folks that are saying hey some trees will grow to heaven and no trees go grow to Heaven that’s the concern.
I don’t know what is the thing that’ll cause challenges for them maybe 20 plus of their revenue in China could create problems long term maybe it’s increased competitive pressures. I don’t know we’re not really seeing that at this point you know this is sort of you you don’t have exact data points that’ll say hey this for sure will happen.
But I think these are things that a conservative investor will consider you know with their own portfolio my top holding is an insurance company where they’ve compounded at you know mid to high teens over a multi-decade perspective.
But I’m assuming they only compound and you know like five to ten percent over the next five years even though that’s you know well below what they’ve historically done over a multi-decade perspective.
It still trades at a discount so you get some sort of valuation expansion there here with Tesla I would want to be able to say hey I’m penciling out such a huge discount relative to what Management’s targeting.
Conclusion
Maybe it’s 20 25 and maybe it’s 15 maybe it’s 20 times earnings multiple and then I’m still getting a huge upside 100-200 percent upside. So I look at this and I’m thinking you know personally maybe I would consider doing a teaser on this.
But I just see so many great clouds on the horizon, one recent data point is like the record jump in consumer uh credit card debt.
I look at that and like that is not a sign of a strong consumer in my opinion that is a sign of someone reaching and in desperation because they had unexpected bills and inflation was coming in too hot which by the way you saw you know credit card debt spiked last time with you know right before the great financial crisis now you might say well delinquencies are low and you know this the clearly the economy is doing really well and inflation is still hot.
So I just look at this and I’m saying I as more of a conservative investor want to have that margin of safety baked in. When I’m investing I want to be able to say hey this has let’s assume slower growth and I may not capture that dramatic upside.
That’s okay there will always be someone making money faster than you that’s what Charlie Munger once said that’s okay you need to find things that are appropriate for your investment Journey.
So I look at this and I’m saying maybe I consider getting a teaser position but at this point. I’m not quite at the point where I’m saying hey I’m gonna go all in part because like look if this is a tough economic cycle.
Even Elon Musk has said hey we might be heading for a recession like the Federal Reserve is tightening too fast and too hard.
You know if that happens how can Tesla really keep growing at hyper speeds? If we’re in a recession like oh I would be skeptical of that. But once again that’s a great Cloud there’s no there’s no certainty
But for now, everyone’s like hey great company clearly doing well I would say the stock market price action is starting to suggest. The fact that it trades let’s say below its 200-day moving averages.
You know trending lower I think that would suggest some of these gray clouds are starting to Spook investors saying hey this could actually happen in the quarters ahead. I’d love to hear your thoughts in the comments below.