Tesla Could Be A Bad Bet From An Investor Point Of View

There have been very few other companies that have evoked as much wide ranging predictions as Tesla Inc.

Uncertainty about the company had been spread by its founder and CEO Elon Musk himself by first promising production targets unilaterally and then the company failing to attain those self imposed targets. He also claimed that the company does not require new capital but went on to raise $8 billion in debt and equity in the last three years.

For investors, Tesla represents two extremes of a spectrum. The prediction that the electric car maker could be worth $700 billion in a decade made by money manager Ron Baron money manager Ron Baron is at the positive end of the spectrum. The prediction translates into the share price of the company increasing ten-fold to be valued at over $4000. At the negative extreme is a prediction by Wall Street banker JPMorgan which has predicted that the Tesla shares would fall down to as low as $195 by December of the current year.

Currently, the market capitalization of Tesla stands at $53 billion. but the fact that the cash at hand of the company is just $2.2 billion and it would need much more till it generates profits, means that at least $5 billion would have to be raised by the company in equity in the next year or two. That would peg the equity valuation of the company $58 billion.

Now assuming the expected return on Tesla shares for investors is 8 per cent, there would be need for Tesla to grow by 51% by the end of 2024 so that it can deliver that percentage of returns to investors. And the market cap of Tesla by that time needs to be around $88 billion.

Now considering the five year period till 2024, one can expect Tesla to deliver a reasonable price-to-earnings multiple of 16.6 which means form that point on, investors would expect Tesla to provide 8 per cent returns on sales and profits. Now considering the that PE ratio, Tesla would be need to generate net earnings of $5.3 billion which would be a swing of $8.4 billion compared to its current annualized losses of $3.1 billion through the first half of 2018.

Currently, the most profitable major luxury car maker is BMW. the company posted after-tax margins of 8.8 per cent last year. many analysts have forecast tesla reaching net margins of 10 per cent in some time which means that the company would have to generate annual sales of $53 billion within a period of just over five years which marks a 31 per cent of annual growth rate.

That would only be possible if Tesla is able to acquire a large portion of the future car market.

“Tesla will be challenged,” says Bart Demandt, automotive analyst and consultant at Carsalesbase.com. “Virtually every luxury player wants to be in the electric car business. Audi is moving ahead, and BMW already has a head-start. It’s a highly competitive market that presents a risk for Tesla.”

(Adapted from Fortune.com)

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Categories: Economy & Finance, Entrepreneurship, Strategy, Sustainability

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