Stock Analysis of Tesla: Risk. Opportunity. Valuation

Stock Analysis of Tesla need to consider the risk and heated up competition

In the last sequel of the Tesla episode, we know that Tesla has an impenetrable economic moat and promising earning power. But, with a sky-high valuation, is it worth buying? Our stock analysis of Tesla tries to shed the light.

The Greener Earth: NEVI-gation
Stock Analysis of Tesla starts with a competitive advantage that meets the opportunity.

The electric vehicle has become a national and patriotic issue. This is a good sentence to start talking about Tesla’s opportunity ahead. As Pete Buttigieg said that a century ago America lead the auto industry, so today America once again has to lead the EV revolution.

The U.S. The Transportation Secretary’s statement is aligned with government policy that was announced in December 2021. Biden pledged that almost 5 billion will be released to rejuvenate NEVI ( National Electric Vehicle Infrastructure) (NEVI). In detail, it will be used to build a national electric vehicle charging network, opening the gate for Americans to access EVs.

Moreover, The President also committed to making at least 50% of new vehicles sold in 2030 are electric vehicles.

A century ago they have General Motor, today they have a new hero. Tesla.

This secular trend not only happens in the US but also in Europe, even stricter. The European commission plan to cut 100% of vehicle emission by 2035. Of course, the electric vehicle is the answer.

With a competitive advantage that can’t be replicated by another carmaker, that is the brand power, deep vertical integration, economies of scale, and intangible asset in the form of government support (read here), Tesla is surely in pole position with its competitor behind far away.

Investor Note: The Side Effect

Problem with government support for EVs to realize a greener planet is a double edge sword. On one side, it is good for Tesla since it will accelerate its growth. But at the same time, another carmaker will also enjoy the same advantage. It is really important to keep watching Tesla’s profit margin as a good indicator to gauge competition pressure from other carmakers. When it is really heated up, the Musk gang should reduce the price of their product.

The Risk: National Program
Stock Analysis of Tesla should look at global warming and pandemics similarities

Though Tesla’s competitive advantage is more than enough to alienate competitors out of its market share, the government and policymaker decision could derail this economic moat. Giving subsidies or support to build charging infrastructure could accelerate competitors to achieve Tesla’s level. Or at least trim the profit margin. This situation is similar when we discuss Moderna stock. The company becomes a sensation due to its success with the RNA vaccine during the pandemics.

Though, under urgent or threatening situations, it is hard to possess a monopoly forever. Policymakers and politicians will urge the whole industry to make the commodity-like product to solve the problem. In this case, global warming and the pandemics. The solution to global warming is EV and the solution to pandemics is the vaccine. Both vaccines and EVs should be accessible, affordable, and inclusive.

This risk will not nullify the opportunity and the competitiveness of Tesla, but surely It will ammunition for competitors to have weapons to pursue Tesla.

Another Risk

We need to consider several possibilities besides that government intervention that can reduce Tesla’s lead in this field.

  1. The first is the Emerging market. Not all citizens could get Tesla. Tesla is expensive in some matrices. Not to say that it is worth the price. But most people in emerging markets like Indonesia, Brazil, and Vietnam, can’t afford it. Also, the country grid isn’t able to the American or European counterpart. They need to solve this before talking about zero-emission.
  2. Battery improvement is good but could disrupt Tesla’s party since it is easier to make EV. t doesn’t need to be cool. It could be looks like a golf car. Small, but compact, just for one passenger. This would be a favorite especially come at a low price.

Valuing The Beast.
More important than financial.

In April 2022, Tesla is walking in the sky with more than a 1 Trillion market cap and more than 200 PE. This means that the market believes Tesla deserves 200 times its current net profit.

This insane number is easily understood when we look at Tesla’s pace in the terms of vehicle production. In 2012, a Chicago-based company manufactured 60 cars per week while in 2021, the number become more than 140 times. Musk-led company manufacture 8,600 cars per week. With the same logic, the market believes that in 2030 Tesla will manufacture more than 1.2 million cars per week. No other carmaker even touches this number, not even close.

Toyota, VW, GM. Never.

Its PE ratio is also higher than Apple (28), higher than Amazon (47), and Microsoft (31). If the growth is our concern, could we assign Tesla as promising 7 times faster than Apple? Amazon? Microsoft?

Let’s try another calculation.

One trillion Tesla market cap exceeds the market cap of all carmakers combined. It is also bigger than Berkshire Hathaway, Meta (Facebook), and Nvidia. Tesla is also bigger than duo Visa and Mastercard combined.

If I have to spend one trillion to buy the company or companies and my priority is monopoly like Warren Buffett, it would be the following:

  1. A quartet of chips, Qualcomm, Nvidia, Intel, and AMD is worth slightly higher than 1 trillion. AI and computer are always with us and has massive trend also. They are also used in EVs.
  2. A quartet of payments, Visa, Mastercard, AMEX, and PayPal worth 1.1 Trillion. Financial services are always tied with economies. So we go with them.

Old Question: Why do Value investors miss Tesla
The Conclusion of Stock Analysis of Tesla

  1. Tesla is a good company with a decent economic moat. Cheap and efficient battery, great scale, loyal customer. But Tesla doesn’t necessarily mean a good investment.
  2. The rationale behind the long bull run is maybe the market expectation of Tesla becoming the next Apple or Amazon. That expectation is reflected in the insane stock price. You need to look at if you have that expectation.
  3. We personally believe that even though we have a pessimistic tone here regarding valuation, the Tesla stock will deliver a good result this year. It may rally again. People’s expectations are strong. We will not be against it.
  4. But we will not be with them either. This is because of the quality investing approach we believe. We invest not because it will deliver extravagant outcomes. We invest by considering the risk. With that price, Tesla is a risky investment, especially if you read our risk section. Please look a for further consideration.
  5. Once again, it doesn’t mean that the price will fall, but we have another great option.