Why We’re Revisiting Our Stance On Tesla Stock

Tesla (NASDAQ:TSLA) posted a better-than-expected set of Q1 2022 results, with revenues growing by 81% year-over-year to $18.76 billion, and adjusted earnings per share more than tripling to $3.22. While revenue growth was led primarily by surging deliveries of the Model 3 and Y vehicles (total deliveries were up 68% versus Q1 2021), Tesla also boosted its average selling price per vehicle by 10% year-over-year to around $54,000 as it prioritized deliveries of more premium trims and ramped up production of refreshed versions of its more expensive Model S and X vehicles. Tesla’s margins performance was also solid, with automotive gross margins, excluding regulatory credit sales, coming in at 30%, up from 22% a year ago and around 29% in Q4. The margin expansion is noteworthy, given the tough environment that Tesla is operating in currently with supply chain bottlenecks, surging input costs, and the Covid-19 related lockdown measures in China, which is home to the company’s second-largest manufacturing plant.

We are revisiting our stance on Tesla stock post the strong earnings, raising our price estimate from around $640 per share to about $1,100 per share, which is slightly ahead of the current market price.  Key changes to our model include stronger revenue growth forecasts (45% annual delivery growth over the next five years) and improved margins (an increase of 450 bps through 2026). Although the EV market is going to get a lot more competitive, we think that Tesla is likely to hold its own, given its cost advantages, manufacturing prowess, and solid brand recall, being an early mover in the space. For instance, the company, which has no advertising budget, says that the orders on its website actually spiked considerably following the Super Bowl, which saw mainstream players heavily promote their electric vehicles. Tesla now also has the capacity to cater to this demand, as it has started the early ramp of production at two new factories, one in Texas and the other in Berlin. Tesla also has a track record of beating delivery guidance. In fact, for this year, CEO Elon Musk says that 60% delivery growth is a possibility, versus the company’s 50% guidance. Tesla’s edge in manufacturing and cost management is also getting more apparent, as its margins rise despite industry headwinds, with the company optimizing manufacturing, substituting components in short supply while benefiting from growing economies of scale.  Tesla’s operating margins for Q1 2022 stood at 19%, roughly 3x the automotive industry average.

That being said, there are risks as well. At the current market price of about $1,000 per share, Tesla trades at over 90x consensus 2022 earnings. While we believe Tesla’s growth supports this valuation, with interest rates poised to rise sharply, investors have been pivoting away from high-multiple names to more value plays and this could pose a threat to Tesla’s valuation. The commodity cycle is another factor to watch, as raw material prices, particularly for batteries, have risen sharply. Although Tesla has been insulated from this, in part due to its long-term contracts, it’s possible that it could eventually feel the impact of the surging spot prices given the sheer scale of its requirements.  Investors probably shouldn’t take the competition for granted, either. Mainstream automakers have been investing tens of billions of dollars into EV capacity and development. Now, although the outcomes have been decidedly mixed so far, if mainstream car companies eventually deliver compelling EVs that prove to be a hit with customers, it could change the narrative around Tesla stock and its valuation.

See our analysis on Tesla Valuation: Is TSLA Stock Expensive Or Cheap? for more details on Tesla’s valuation and how it compares with peers. For more information on Tesla’s business model and revenue trends, check out our dashboard on Tesla Revenue: How TSLA Makes Money.

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[1] Month-to-date and year-to-date as of 4/21/2022
[2] Cumulative total returns since the end of 2016

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