Tesla (NASDAQ: TSLA) split its stock 5-to-1 on 31 August. The split had the effect of reducing the Tesla share price from $2,213 per share to $444. However, as of this Thursday’s close, the Tesla stock price has fallen by 17% to $371 per share. But lets put this in context. Tesla has had an epic run this year even after the price decline. Furthermore, there was a general US stock sell-off, so Tesla’s slump was not made in isolation.
There is still a lot of buzz around Tesla. And, with the stock split and the recent decline, Tesla shares have become a lot more affordable. UK investors must be asking themselves if now is the right time to take a ride with Tesla. To help answer that, let’s think about where Tesla is and where it needs to be in 10 years time when a long-term investor might want to offload their stock.
A vision of the future
Currently, there is a line up of four Tesla electric vehicles. The Model 3 and Model Y are the lower-priced car and SUV offerings and the Model S and Model X are the premium equivalents. The introduction of the cheaper Model 3 and Model Y has helped Tesla sell a lot more cars. The company now features in the 2019 top-20 list of publicly traded automakers in terms of revenue, at number 20 with a market share of 1.2%. Toyota – which now has a far lower market cap than Tesla after the later’s stock price surge – is in the number one spot with a market share of 13.4%.
Toyota has revenues of $285bn on around 10.7m cars sold. Tesla, in comparison, is selling a little under 400k vehicles and collecting $25bn or so in revenue. Now, the huge market cap and high Tesla stock price are said to be justified because extraordinary revenues and earnings are in the pipeline. So, in 10 years, Tesla should look a lot like Toyota does now.
Toyota is a mass-market manufacturer and sells cars at an average price of around $26,662, with operating margins of about 8.5%. Tesla has an operating margin of approximately 4.78% and an average selling price per vehicle of $58,500. So let’s assume Tesla is selling 11 million cars annually in 10 years. That average selling price has to come down, so let’s assume $40,000 (closer to the Model 3 price). Operating margins are 9.21% and Tesla has auto revenues of $426bn and a market share of 13%.
Should UK investors buy Tesla stock?
From my model of Tesla, I am looking at $500bn in total revenue in 10 years. That includes car sales but also about $80bn from its energy generation and storage and service businesses. Earnings per share are $24. A current shareholder (holding at $372 per share) expecting 4% annual share price growth over 10 years would need to sell their shares at $549, or 27 times earnings per share (EPS). 10% growth ($962 per share) requires selling for 47 times EPS and 25% needs 168. For what should be a mature company, these are lofty multiples. And it would take Tesla growing revenues at 35% per year for a decade and ending up selling more cars than Toyota at a higher average price to get there.
Of course, the Tesla stock price may surge again, and make investors rich. But, on a long-term basis, and assuming an extreme growth scenario, Tesla shares look overpriced to me right now.
James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.