Tesla’s stock is highly debated due to its innovative potential and high valuations, with strong arguments from both bulls and bears highlighting its future prospects and current financial challenges.
- Tesla’s innovation and future potential in robotics and AI drive bullish sentiment despite current high valuations.
- Bears argue that Tesla’s financials are challenged by macroeconomic sensitivity and intense competition, impacting margins.
- The stock’s high valuation reflects optimistic assumptions, but significant uncertainty remains regarding the success of Tesla’s future ventures.
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One of the most hotly debated stocks today is Tesla (TSLA), and this is well justified. It’s not just due to the engagement of its shareholders and customers’ company’s fame but also because of the complexity of its thesis, which has strong arguments on both sides.
For instance, from the bullish perspective, the company’s innovation and numerous new ventures it could explore in the future are evident. On the bearish side, the company’s weaknesses, such as competition, macroeconomic sensitivity, and rich multiples, are also quite apparent.
Let’s delve into some of the strengths and weaknesses of Tesla’s thesis throughout this article.
Tesla Bullish Thesis
One thing is certain: Tesla deserves credit for its innovation. The company has done an excellent job in the EV market over recent years, becoming one of the leading automotive companies globally and building its moats through technological dominance — not just in EVs but also with features like Autopilot and, in the future, Full Self-Driving (FSD). This success is reflected in its financials, as seen in a chart showing the company’s EBITDA growth, which has multiplied several times in recent years.
However, the primary catalyst for optimism regarding Tesla’s stock is its future potential, not just as an automotive company but as a robotics and AI-related firm. The thesis offers numerous optionalities, from Optimus to Cyber Cab/Robotaxi.
In some quarters of 2022, Tesla already stood out with an EBITDA margin above the industry average (just over 20%). Given their scalability and potential for cross-selling, imagine this potential if these initiatives gain traction in the coming years.
For FY2027, analysts project an average EBITDA of $35.6 billion, which, against a projected revenue of $160 billion, would result in an EBITDA margin of 22% — a significant improvement from the pressured margin of the last twelve months, which was around 13%.
Notably, Adam Jonas from Morgan Stanley, a bullish analyst on Tesla, has a price target of $310 for the stock (an upside of over 66%), citing factors such as the company’s future in AI, which is expected to be shaped at the shareholder meeting on June 13th.
To summarize the bullish side, the key points are:
- Strong brand moats
- Great prospects with numerous optionalities and innovations
Tesla Bearish Thesis
As mentioned earlier, the bears also have strong arguments against the thesis. Fundamentally, Tesla is facing a challenging period that has negatively impacted its financials. The recent margin reduction is due to various factors, including a worsening macroeconomic environment. As a consumer-related company, Tesla is sensitive to these conditions and faces a much more aggressive competitive landscape.
This has been evident for some time. In Q4 2023, BYD (BYDDF) surpassed Tesla in BEV sales/deliveries. With declining sales, Tesla had no choice but to implement price cuts in various regions, such as China, the U.S., and Germany.
The prospects also do not excite the bears, primarily due to “uncertainty.” While there is no doubt about Tesla’s potential initiatives, most are still intangible. For example, it is nearly impossible to estimate how much Optimus could contribute to revenue or margins. Even FSD, which is more advanced, faces uncertainties, such as regulatory issues.
Colin Langan of Wells Fargo, a bearish analyst, has a Sell rating on Tesla stock with a price target of $120, indicating a downside of 35%. His concerns include Tesla’s Autopilot and scrutiny by the NHTSA.
Finally, despite the uncertainty surrounding these ventures, the stock trades at a premium valuation, meaning optimistic assumptions about the maturation and evolution of operations are already priced in. The current NTM P/E ratio for Tesla is 67.5x.
To summarize the bearish side, the key points are:
- Challenging landscape
- Uncertainties about Tesla’s initiatives and
- Tesla stock valuation
The Bottom Line
Considering the above information, Tesla’s thesis can be classified in many ways, but trivial is not one of them. In fact, the thesis is quite complex. Tesla can be seen as an expensive stock, but it could even be considered a bargain if its initiatives reach their full potential.
There seems to be excessive uncertainty surrounding the stock, and the current valuation does not align with the challenging scenario, which detracts from the company’s fundamentals.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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