By Andrew Dickson
There is a difference between a company and its share price. A company can be poor and its stock expensive. That isn’t a good mix. A company can be great and its stock cheap. That is a good mix.
But what about a company that is probably great with a share price that is magnificent? Well, that’s Tesla /zigman2/quotes/203558040/composite TSLA +3.02% .
Investors are polarized on this one. Lovers or haters. $TSLA or $TSLAQ. The supporters and detractors are similarly fervent in their views. There is little nuance.
I have been impressed by the company — but thoroughly stupefied by the performance of its shares. Using the most recently disclosed fully diluted share count of 1.21 billion shares, and based on an $800 share price , the company has a market cap that is just $35 billion shy of $1 trillion.
That is 2.5 times as large as Walmart. It is 25 times larger than Ford.
I admittedly have a natural value bias, but I want to try to rewire my circuits and envision an optimistic scenario that results in upside for Tesla’s share price.
So I’ve gone out to 2035, a year where it should be obvious to even the bears that production of internal-combustion-engine vehicles will be niche, if not forbidden. I see 135 million cars and light trucks produced worldwide that year and assume that 90% of them will be fully electric. Those arguing for an autonomous, ride-sharing future will have to revise this figure down.
Toyota /zigman2/quotes/200537742/composite TM +0.43% /zigman2/quotes/203803129/delayed JP:7203 +0.40% was founded in 1937 and is the largest auto manufacturer in the world. Today, it has a 12% global market share. Volkswagen /zigman2/quotes/203434344/delayed XE:VOW3 +1.33% /zigman2/quotes/210463125/composite VWAPY +0.97% (also founded in 1937) has 12% too. I generously assume that Tesla will sport a 20% share of all EVs produced around the world.
In 2019, Tesla produced 365,000 units. In that same year VW and Toyota each produced nearly 11 million. In the scenario painted here, Tesla would produce over twice that amount (22 million vehicles) in 2035.
And despite Tesla becoming a mass market producer, I model a virtue-signaling price premium of 12% over the industry, getting us to an average selling price of $50,000. This would result in Tesla revenues of nearly $1.2 trillion dollars.
Toyota today does 7% net margins. VW does 5%. For this bullish Tesla scenario, I will liberally assume 9% net margins. This means nearly $110 billion of net profit.
Meanwhile despite the princely stock-based compensation plans and aggressive capital raising required to finance this kind of expansion, I am modelling only 2.5% annual growth in diluted shares. On the 1.75 billion in shares I expect in 2035 this all works out to over $60 in earnings per share.
I will also assume that despite it already being huge, Mr. Market will still pay a P/E of 20 for this mass market automaker. That gets me to fair value in this historically unparalleled scenario of $1,230 per share. This is much higher than where it is today.
But this is in 2035.
If I assume that between now and then, Mr. Market only expects to make just 10% a year on his Tesla investment that gets us to share price today of about $295.