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Tesla (TSLA) Is Charged And Ready To Drive Returns

Daniel Laboe

Tesla TSLA is one of the most volatile stocks trading in the US today. It lost almost 50% of its value in the first 5 months of the year due to concerns about liquidity, then rebounded over 40% since the beginning of June. The rebound was caused by the surge in capital from a seasoned equity offering (SEO) it had in May, which eased liquidity concerns. This stock has a mind of its own and doesn’t appear to follow any broader index. I believe that TSLA has the momentum to break through this $250 level and reach new highs.

The key catalyst for my buy recommendation includes eased liquidity concern from the SEO and the ahead of schedule Gigafactory 3 in China that could make Tesla the #1 electronic vehicle provider in the country. The company is estimated to show strong profitability by 2020, and sales are expected to grow exponentially over the next 3 years.

Momentum is on TSLA’s side, and I am confident that it will continue if the firm is able to show robust financials in the upcoming earnings report on Wednesday, July 24th. TSLA is a big mover on earnings with an average price change 7.8% over the past 10 earnings releases.  

China Exposure

Tesla’s Gigafactory 3 is underway outside of Shanghai, expecting to start production in November. The factory will produce battery cells as well as Model 3s and Model Ys with an initial run-rate target of producing 250,000 vehicles and a 500,000 vehicle capacity annually.

An estimated 35,000-40,000 vehicles are expected to be produced in 2020 and could produce up to 60,000 EVs by 2021, according to Morgan Stanely. Tesla’s ostentatious CEO Elon Musk, is aiming to produce 3,000 Model 3s per week by the end of 2019.

China is the largest market for electronic vehicles in the world with government incentives stimulating this space. The EV market in China is extremely competitive but analysts believe that once Tesla’s are domestically made the demand will spike.

Valuation

The first valuation metric that I am going to use is the 12-month forward EV/EBITDA, which is a good multiple for firms with a lot of debt, which Telsa is primarily financed by. TSLA is trading at 13.8x EV/EBITDA, the lowest end of this metric’s 5-year trend, having traded as high as 86.8x and as low as 10.9x.

TSLA is also trading at a 1.5x forward P/S which is also at the lowest end of its 5-year trend, having a range of 7x to 1.1x. There is no good comparison for this revolutionary firm, so comparing it back to its own trends is the best way for me to analyze relative value. From these metrics, it appears that TSLA could be trading at discounted multiples.

US automakers Ford F, General Motors GM, and Fiat Chrysler FCAU are trading at much lower mutliples because they are unable to achieve the same growth or gross margins.

Take Away

Tesla is one of those companies that everyone wants to succeed (unless you have a short position) because it symbolizes not only a cultural shift towards a cleaner world but a drive to reach levels of innovation that humans never thought was possible.

This stock is driving north at discounted valuations that investors haven’t seen TSLA trade at before. Gigafactory 3 is going to drive Tesla’s topline exponentially being located in EV’s highest demanding country. I just bought this stock today at $250 and plan on selling at $350, a level this stock has struggled to break through. Some analysts are setting price targets as high as $400. Consider the high level of volatility and risk that TSLA carries before putting on a position.

 

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