Value Investor Daily #36

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Tesla (NASDAQ: TSLA) is renowned for pushing boundaries and challenging expectations.

CEO Elon Musk's recent assertion that Tesla could reach a $30 trillion market cap (a gain of over 50x from today’s market cap of $583B) has generated both excitement and skepticism.

Here’s a recent video breaking down what Elon said at the recent shareholder’s meeting:

While the ambition is notable, evaluating Tesla's current valuation and growth prospects from a value investor's perspective is essential. Let’s take a look.

Current State of Tesla's Business

Tesla's journey is characterized by innovation and rapid growth, but it currently faces significant challenges.

Global electric vehicle (EV) sales have slowed, impacting Tesla's operations and future plans. In the first quarter, Tesla reported a decline in revenue, issued weak guidance, and faced a challenging market environment.

In China, Tesla's second-largest market, recent sales data revealed a 7% year-over-year drop, despite sequential improvements.

Increased competition from local, lower-priced models has contributed to this slowdown. As a result, Tesla has reduced production in China and increased advertising expenditure, negatively affecting profit margins.

Tesla's vehicle deliveries fell by approximately 8.5% to 387,000 cars in the first quarter, the first decline since 2020. Despite these hurdles, Tesla remains focused on growth, industry dominance, and cost-efficiency programs.

The Vision: Tesla's Fourth Master Plan

At the event, Elon Musk hinted at Tesla's fourth Master Plan, calling it "epic."

Historically, Musk's Master Plans have outlined Tesla's strategic vision. The first Master Plan in 2006 aimed to create a high-end, low-volume car to fund the development of a medium-volume, lower-priced car.

The second Master Plan in 2016 focused on integrating energy solutions, expanding EV offerings, and advancing vehicle autonomy.

Master Plan 3, introduced last year, envisioned large-scale electrification through scaling Tesla’s auto and energy businesses.

The details of Master Plan 4 are yet to be disclosed, but it is expected to emphasize AI, robotics, and hybrid computing. 

Musk, during Tesla’s annual shareholder meeting, suggested that Tesla's market cap could reach $5 trillion, with the humanoid robot Optimus potentially adding another $20 trillion to $25 trillion in value.

This ambitious vision aligns with Tesla's ongoing efforts in robotics and vehicle autonomy.

Bullish Wall Street Perspective

Morgan Stanley analysts foresee a strategic shift for Tesla, moving beyond just EVs.

They predict Master Plan 4 will focus on "Anything But Cars" (ABC), indicating a potential de-emphasis on Tesla's core auto business. This shift reflects Tesla's growing interest in AI and robotics and a broader technology ecosystem that includes Musk's other ventures, SpaceX and X.

Cathie Wood of Ark Investment forecasts a significant AI-driven surge for Tesla, predicting shares to reach $2,600 by 2029.

She expects Tesla to dominate the autonomous driving software market, successfully launch a robo-taxi business, and achieve substantial revenue growth, potentially reaching an enterprise value of $8.2 trillion.

Wood anticipates Tesla will achieve profits of $300 billion and revenues exceeding $1.2 trillion annually by 2029.

These ambitious projections hinge on Tesla launching a significant robo-taxi business, which could drive revenue growth and help Tesla compete with companies like Uber in the ride-sharing market. Additionally, automakers are expected to increase production by 45% annually.

Valuation First, Growth Later: A Value Investor's Perspective

Despite Musk's ambitious projections, value investors should prioritize current valuation over future growth.

Our fair value estimate, based on 12 valuation models including P/E multiples, EV/EBIT multiples, and discounted cash flow (DCF) analyses, suggests a fair value of approximately $190. This indicates a potential upside of just 4.1% from the current stock price, implying that the stock is fairly valued at present.

While Tesla's ventures into AI, robotics, and autonomous driving hold promise, they also entail substantial risks and uncertainties.

What would need to happen from here to justify a $30 Trillion valuation in the next ten years?

If interest rates hold at 4.25% (unlikely, but you can adjust as interest changes) and you use that as your assumed earnings yield, that would imply a future P/E ratio of 23.5.

That would mean $1.27 trillion of earnings by then, up from TTM earnings of $13.6 billion. That means earnings growth of 57% per year. If you assumed 20 years, it would require just over 25% growth per year.

In the age of AI, EVs, robotics, and more, anything is possible, but it’s better to find 1-foot hurdles to jump over.

Conclusion

Elon Musk's vision for Tesla is revolutionary, with aspirations of reaching a $30 trillion market cap. While this ambition is inspiring, value investors must ground their expectations in reality.

Given government support, consumer demand for EVs, and Elon’s ability to generate revolutionary breakthroughs through highly technical teams, the company will likely have much higher revenues in 10-20 years.

However, competition and the brutal nature of capitalism will continually attack excess margins.

Don’t short the stock, but don’t go YOLO either, just because of “$30 Trillion” headlines. If you’re going to invest, position accordingly at something like 1-2% of your “risk” funds.

Focusing on fundamentals and current valuation before betting on future growth is crucial. Wait for a margin of safety of at least 25-50% before sizing bigger.

Tesla's innovative projects and strategic shifts could indeed transform the company and its industries. However, prudent investing requires careful assessment of risks, challenges, and realistic growth prospects.

That’s all for today. Thank you for reading!