It's hard to deny that Tesla (NASDAQ:TSLA) isn't a revolutionary company pushing the boundaries of evolution. In a short period, TSLA has created a complete energy and transportation ecosystem that is fully integrated. For an individual who utilizes TSLA's suite of products, they can power their home, store energy to power their home, and charge their automobile just from the sun shining. Evolution occurs throughout every industry, and TSLA is pushing the limits in the EV market, renewable energy generation and storage, and through their autonomous full self-driving software. TSLA is one of the most innovative companies of a generation, and their technological advances positively impact society. In the past decade, TSLA has grown its revenue from $413.3 million to $41.86 billion, a 10,128.72% increase while becoming profitable. TSLA generates tens of billions in profit, has produced $2.18 billion in net income for the TTM, and has been free cash flow (FCF) positive for three years. I would classify TSLA as a great company for all these reasons, but just because a company is great, it doesn't mean its stock is.
(Source: Tesla Q2 2021 Slide Deck)
TSLA is certainly proving many of their critics incorrect as their financials continue to improve drastically. First, the complaints were that TSLA barely sold cars, then as TSLA ramped up production and delivery, the remarks morphed into TSLA still doesn't turn a profit. TSLA is still a young company, and I like what I see when I look at their financials. In the past five years, TSLA has increased its annual revenue by $34.86 billion (296.47%) at an average annual rate of 42.31%. More recently, in the past three years, TSLA has increased its revenue by $20.49 billion (95.06%) at an average annual rate of 20.35%. Over the past decade, TSLA has sequentially increased its revenue on an annual basis.
TSLA's revenue increase has translated to its bottom line and margins. TSLA's gross profit has increased on an annual basis over the past decade, following its revenue. In the previous five years, TSLA's gross profit has increased by $7.63 billion (477%) at an average rate of 44.72%. In the more recent three years, TSLA has grown its gross profit by $5.19 billion (128.3%) at an average rate of 34.26%. This has positively impacted the bottom line as TSLA had its first profitable year in 2020, producing $721 million in net income. In the TTM for 2021, TSLA has generated $2.18 billion in net income, which is a YoY increase of $1.46 billion (202.50%).
TSLA's gross profit margin and net income conversion ratio are improving as a byproduct of their financials. TSLA's gross profit margin has increased from 18.83% in 2018 to 22.04% in the TTM. After years of losing money and having a negative net income conversion ratio, TSLA converted 5.21% of its total revenue to net income in the TTM. TSLA finished 2020 with a net income conversion ratio of 2.29% and has more than doubled this metric in the TTM.
TSLA is a growing company that's producing tens of billions in revenue and is now profitable. Their capital expenditure continues to increase as they reinvest into their business. The growing cap-ex shouldn't be considered negative because TSLA has been FCF positive for the past three years, organically paying for their infrastructure advancements. Over the past two years, TSLA's cap-ex has increased by $5.13 billion from $1.43 billion to $6.56 billion. TSLA is generating more than enough FCF to facilitate its growth as they have produced $17.53 billion in FCF over the past three years while allocating $11.22 billion to cap-ex.
Overall I like what I see from TSLA's numbers. Total revenue is growing substantially, which is then recognized in their gross profit, net income, and FCF. TSLA's gross profit margin and net income conversion ratios are increasing, which is also a plus. From a numbers aspect, I am no longer considering TSLA a cult stock as they are making real progress and trending in the correct direction. TSLA has done an excellent job running their business and blowing holes through many previous criticisms.
(Source: Seeking Alpha)
TSLA the company and TSLA the stock are two separate things. TSLA the company manufactures goods and services including automobiles, renewable energy products, and software then sells them throughout various consumer markets. TSLA the stock is equity ownership in TSLA, which individuals can purchase on the open market. These are two completely separate things. My issue has never been TSLA as a company; it's been the valuation and what people are paying for an equity position in TSLA the company. So far, I have been incorrect, as shares of TSLA have increased by 80.24% in the past year and 1,754.51% over the past five years. This has been one of the greatest investments someone could have made, and I congratulate everyone who had the conviction to invest in TSLA and ride the wave to massive gains.
(Source: Seeking Alpha)
I am indirectly invested in TSLA through index funds, and TSLA's share price is concerning to me; if shares of TSLA decrease in price, there is a chance the major indexes would follow to some extent, and I am still disappointed that TSLA was added to the S&P 500 index. I believe shares of TSLA are grossly overvalued, and individuals are throwing caution to the wind and investing in TSLA because they like the brand or Elon Musk. Fundamentals matter, and when I am told I don't understand TSLA because you're paying for future growth, it's infuriating.
TSLA has a market cap of $726.25 billion, making them one of the largest companies in the market. Many people have argued with me that TSLA is a tech company, so for right now, I am going to treat TSLA as a tech company. Right now, investors are paying a 334.47 P/E ratio based on the TTM for TSLA compared to 29.73 for Apple (AAPL) and 58.47 for Amazon (AMZN), and a P/S ratio of 17.18 compared to 7.4 for AAPL, and 13.63 for AMZN. When I review the numbers, they don't add up. TSLA has grown its annual revenue by $34.86 billion (296.47%) over the last five years. Five years ago, TSLA's revenue was $7 billion compared to AAPL's $215.64 billion and AMZN's $135.99 billion. In the same five-year period, AAPL has increased its annual revenue by $131.52 billion (57.37%), 377% of the amount TSLA grew their revenue by. In the past five years, AMZN has increased its revenue by $307.31 billion (172.78%), which is 882% of the amount TSLA grew its revenue by.
Is the justification about paying for growth in today's share price for TSLA a valid point? I don't believe it is. When you compare the 2020 fiscal year to the TTM, TSLA has increased its revenue by $10.33 billion (32.74%), a fantastic growth rate. I am not downplaying what TSLA has accomplished because they're doing a fantastic job growing their business. Most businesses would love to grow their revenue by 32.74% YoY, especially when talking about $10.33 billion in revenue growth. Here is one of many problems for me, AAPL and AMZN both grew their revenue more in the same time period than what TSLA generates overall. From the end of the fiscal year, 2020 through the TTM, AAPL has increased its annual revenue by $72.64 billion (26.46%), and AMZN grew its revenue over this period by $57.23 billion (14.83%). How is their valuation justified for everyone who claims TSLA is a tech company or even a software company?
I will do a deeper dive on TSLA's valuation as I can foresee many comments indicating that I picked two of the largest companies and their bad examples. I am going to expand my valuation analysis to include AAPL, AMZN, Microsoft (MSFT), Facebook (FB), Alibaba (BABA), Berkshire Hathaway (BRK.A), Oracle (ORCL), and Ford (F). TSLA has a market cap that exceeds $700 billion, so my choices for similar-sized companies in comparable industries are slim. If you believe TSLA is a tech company, I have added AAPL, MSFT, FB, AMZN, and BABA to the comparison. If you believe TSLA is an automobile company, I have F in the analysis, and if you believe TSLA is a software company, I added ORCL. I have also added BRK.A for good measure as a conglomerate of multiple industries.
When I take an equity stake in a publicly traded company, I am making a monetary investment on the present value of future cash flow. Nobody in the history of investing said I would invest capital in a business that will never be profitable or generate a negative return on their investment. The same is true for TSLA; by investing in TSLA today, you're investing in the future value of their cash flow as the business grows.
I am using the TTM for the fiscal year 2021 because I don't have a crystal ball, can't predict the future, and can't foresee variables that could impact each companies projections for 2021. Since I am using the TTM for everyone, I would like to think everyone will say this is a fair analysis. Price to sales is a valuation that compares the stock price to the revenue generated per share. It's an indication of the value placed on each dollar of revenue generated. A lower P/S ratio could indicate that the share price is undervalued. Today TSLA has a P/S ratio of 17.18, which is larger than every company in the analysis. An investor is paying more than double for each dollar of sales compared to AAPL and more than quadruple compared to AMZN. By this metric, TSLA is overvalued.
Price to earnings is used to value a company's share price to the earnings it generates and indicates how much an investor is willing to per $1 of earnings. A lower P/E ratio could indicate that a company's share price is undervalued. TSLA has a P/E ratio of 334.47, meaning that investors are willing to pay $334.47 for every dollar of earnings they generate. TSLA has produced the least amount of net income from all of the companies I am looking at. Considering this, AMZN has the second-largest P/E ratio at 58.47, and they have generated $29.44 billion in net income compared to TSLA's $2.18 billion. In the TTM, TSLA has grown its net income by $1.46 billion (202.5%), while AMZN, in the same respect, increased its revenue by $8.11 billion (38.01%), which is almost quadruple what TSLA has produced in the TTM. Why investors are paying such a high rate for TSLA's earnings is a mystery. When looking at FB, you could pay a P/E of 27.81, and in the TTM, FB has increased its annual net income by $9.81 billion (33.66%). The big questions are will TSLA get to the point when they're generating the types of net income that AMZN and FB are, and when they do, will they be able to grow at a YoY rate that exceeds 30%?
Next, I am looking at the return on equity to measure each company's profitability in relation to the equity on the books. TSLA has the lowest ROE at 8.31%, which is lower than F's 9.83% and significantly lower than all the tech companies I am looking at. TSLA has the lowest ROE and the largest P/S and P/E ratios. I would want a high ROE that continues to increase to justify paying a premium for a company's earnings and sales. Why would someone want to pay such a high cost per $1 of sales and earnings when the amount of profits generated from its equity is low? This metric drastically overvalues TSLA in comparison to the other companies I have looked at.
Mr. Market has placed a multiple of 27.67x on TSLA's equity compared to its market cap, the 3rd largest of the nine companies I am comparing. ORCL has the largest multiple on its equity at 42.22x, then AAPL with 38.27x. ORCL has produced $13.75 billion in net income of $5.95 billion in equity, placing their ROE at 230.95%. ORCL's equity is the most efficient out of the group, and they trade at a 19.07 P/E and a 6.48 P/S. AAPL has a multiple of 38.27 on its equity. The important thing to keep in mind is that AAPL continuously gives tens of billions back to shareholders quarterly through buybacks and dividends, so their equity will fluctuate and seem lower than their peers. AAPL also generated $86.80 billion in net income in the TTM for an ROE of 135.04%. I think all three are high multiples, but AAPL's is justified in my mind, and I would need to look deeper into ORCL's 10k. Should TSLA have a larger multiple on their equity than MSFT, AMZN, FB, or BRK.A? In my opinion, no. How the market can justify placing a 27.67x multiple on TSLA's equity when it generated $2.18 billion in net income compared to a 15.85x multiple for MSFT when they generated $61.27 billion in net income for an ROE of 43.15% is ludicrous. What could be even crazier is that the market has placed a 7.6x on FB's equity, and TSLA is given a multiple that's almost 4x larger. FB has 526.58% more equity than TSLA and generates an ROE of 28.18% as its equity has produced $38.96 billion in net income compared to TSLA's ROE of 8.31% and net income of $2.18 billion. The argument of paying for growth is not relevant as FB has grown its net income by $9.81 billion or 33.66% in the TTM compared to 2020, which is $7.63 billion more net income than TSLA produced for the entire TTM.
The last metric I want to look at is market cap to free cash flow. TSLA generates the lowest amount of FCF in the group with $3 billion yet, Mr. Market once again has given TSLA the largest multiple at 242x. The market has placed almost the same valuation on AMZN's FCF multiple, and there is no way that TSLA and AMZN deserve the same multiple in any metric. AAPL generated $94.77 billion in FCF, and the market placed a multiple of 25.96x on its FCF, while F generated $15.21 billion in FCF and is given a 3.39x multiple. No matter what type of company you consider TSLA, every multiple and ratio I have looked at that has been placed on TSLA is ridiculous.
I don't understand how TSLA shareholders will defend the company and Elon Musk no matter what occurs. On the balance sheet, it shows how many outstanding shares a company has. I would love to believe people read through earnings and annual reports in the same detail that I do, but I know it's wishful thinking. One of the biggest killers for shareholders is dilution from additional shares. Here is some simple math. Company ABC has 1,000 shares outstanding. You take an equity position in the company and buy 50 shares. You now own 5% of the equity in company ABC (50/1,000). If company ABC issues 1,000 more shares to raise capital, you're now diluted, and the 5% equity position your shares represent now represents 2.5% (50/2,000) of the company.
(Source: Seeking Alpha)
At the end of 2011, TSLA had 522.7 million total common shares outstanding. As of the last report, TSLA had 984 million common shares outstanding. Over the past decade, TSLA has diluted shareholders by 88.15%. There are many reasons why companies issue shares, and it's not uncommon for companies to issue shares instead of tapping the debt markets, especially when there is a following like TSLA's. TSLA has issued 176.2 million new shares in the past five years and diluted its shareholders by 21.81%.
TSLA has been one of the best investments over the past five years, appreciating by 1,754.51%. TSLA has grown its market cap to over $725 billion dollars while shareholders have been diluted by 88.15% over the past decade and 21.81% in the last five years. In addition to the dilution, TSLA generates less than $3.5 billion in FCF and net income. I understand loving a company and the products and services it produces, but I don't know how current shareholders are ok with the dilution they have experienced and why people are willing to pay unrealistic multiples for a company that continues to dilute its shareholders.
In February, news broke that TSLA purchased $1.5 billion of Bitcoin (BTC-USD) and added BTC-USD to its balance sheet. How can shareholders be ok with this? Instead of using some of TSLA's cash stockpiles to buy back shares, they add BTC-USD to the balance sheet. If I were a shareholder, I would be furious. If TSLA is a fantastic investment, management should have repurchased shares and made each shareholder's equity position more valuable. TSLA was at all-time highs back in January, but even at $850 a share, TSLA could have repurchased 1.76 million shares. That may not seem like a lot, but reversing the dilution and starting to buy back shares would be beneficial to shareholders. Instead, management basically said we like BTC-USD more than TSLA shares, so we're going to use some of our cash to add it to the balance sheet and continue to dilute shareholders as an additional 24 million shares were issued in 2021.
Here are the problems I have, TSLA is still a car company, and they are being valued as if their roadmap of projects have been implemented and are crushing the competition. In Q2 2021, TSLA generated $11.96 billion in total revenue. Automotive sales came in at $9.87 billion, which was 84.57% of their total revenue. Automotive leasing was $332 million, bringing their total automotive revenue to $10.21 billion or 85.35% of their total revenue. Energy generation and storage accounted for 801 million of revenue (6.7%), while Services and other accounted for $951 million of its revenue (7.95%). Can someone explain how TSLA isn't an automotive company when 85.35% of its revenue comes from the sale and leasing of vehicles?
When you look at where TSLA's profit is generated, any argument that someone could try to make gets debunked immediately. TSLA's cost of revenue is $9.07 billion leaving them with a gross profit of $2.88 billion in Q2 2021. It cost TSLA $781 million to generate $801 million from Energy generation and storage, so they generated $20 million in gross profit from that business segment. TSLA lost money on Services and other as it cost $986 million to generate $951 million in revenue for a loss of -$35 million. TSLA generates 100% of its gross profit from automotive sales and leasing. This may not be the case in the future, but today TSLA generates 100% of their gross profit and 100% of their net income from the manufacturing and selling of automobiles. These numbers are directly from TSLA. It is simply incorrect for anyone to say TSLA is anything but an automotive manufacturer with other business segments they are currently building out. TSLA is an automotive company that's being valued as if it has the same metrics as the top tech companies when it's not a tech company.
(Source: Tesla Q2 2021 Slide Deck)
I want to be very clear; I am a fan of TSLA the company, not TSLA the stock. I understand that TSLA has the potential to change the world, and they have created a fully integrated renewable energy system while paving the way for EV's. I understand that TSLA is at the forefront of fully self-driving software that may be scalable outside of TSLA vehicles. TSLA has tripled their energy storage deployments YoY in Q2, and their solar deployments also tripled YOY in Q2 2021 as they reached 85 MW. TSLA operates in multiple scalable businesses, and today you're paying for their future growth in EV's, energy storage, energy generation, robo taxis, and software. I understand the company, like their business segments, and like their fully integrated approach, which has tremendous potential. So what is it that I don't understand about TSLA?
TSLA is drastically overvalued, and it scares me because I am indirectly invested in TSLA through index funds. I am a fan of the company and love their progress, but the stock is broken. TSLA trades at an FCF multiple of 242x and an equity multiple of 27,67x compared to its market cap, and has a P/E of 334.47 based on the TTM. TSLA is not a technology company, but even if that's how TSLA is being valued, there is no reason its metrics should exceed AAPL, AMZN, FB, or MSFT. TSLA's current growth is commendable, but it doesn't hold a candle to AAPL, AMZN, FB, or MSFT. The market is placing a multiple of 25.96x on AAPL's $94.77 billion in FCF while giving TSLA a 242x multiple on $3 billion of FCF. F, which is a pure auto manufacturer, generates $15.21 billion in FCF, and the market places a 3.39x multiple on its FCF. If you were to place a multiple of 40x on TSLA's FCF because of pricing in future potential growth and give TSLA some slack, their market cap would be $120.04 billion. When making capital investments into businesses, you're making an investment in the value of future cash flow. TSLA's metrics and valuation are broken, investors are paying what I consider exorbitant prices for equity in TSLA, and to this day, shareholders continue to be diluted. I love the company, but I think the stock is drastically overvalued, and anyone looking to start a position should closely examine the numbers. Congratulations to everyone who is a shareholder and made massive returns, but maybe it's time to reevaluate your investment.
This article was written by
I am focused on growth and dividend income. My personal strategy revolves around setting myself up for an easy retirement by creating a portfolio which focuses on compounding dividend income and growth. Dividends are an intricate part of my strategy as I have structured my portfolio to have monthly dividend income which grows through dividend reinvestment and yearly increases. Feel free to reach out to me on Seeking Alpha or https://dividendincomestreams.substack.com/
Disclosure: I/we have a beneficial long position in the shares of AAPL, AMZN, FB, BABA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters.