Tesla, Inc. (TSLA) is an electric vehicles (EV) manufacturer and retailer. The company has enjoyed tremendous success from its stylish yet affordable vehicles under the guidance of CEO Elon Musk. I am bullish on the stock.
Key Efficiency Metrics
A consistent issue with many EV companies is their financial efficiency. Much of an EV firm’s capital gets re-invested in the business, especially into research & development, due in part to the nascent nature of the industry.
Tesla has continued to invest aggressively, with its capital expenditures (CapEx) increasing by 14.97x over the past year. However, the company’s ability to scale its revenue faster than its spending is what’s setting it apart in the EV space. According to its latest earnings report, Tesla’s CapEx to revenue ratio is only 14.9%, meaning that its absolute sales numbers are eclipsing its re-investment rate by 6.71x. Additionally, Tesla has managed to widen its operating margins by 12.07% during the past year, conveying a more robust business overall.
Rising input costs remain a worry for most of Tesla’s mid to downstream stakeholders. However, this ought to be a sector-wide phenomenon, which is already priced by the stock market, judging by the stock’s price slowdown during the past six months. I see input costs as transitory; many of Tesla’s input cost worries are related to metal prices, which hold price elasticity and are thus temporary concerns. The market is generally forward-looking and could soon price the stock based on future commodity price drawdowns.
Chinese Performance Looking Strong
Tesla has been prominent in China’s market for quite some time now, and the firm’s February delivery numbers suggest that matters are snowballing rather quickly.
The EV giant sold 4.7% more vehicles year-over-year by February to China, and currently exports thousands of units globally from its Shanghai plant. However, as the Berlin gigafactory ramps up production, these numbers are expected to shift toward Europe.
China remains adamant that it could assist with any meaningful initiative to increase EV deliveries over the coming years, quelling the impacts from rising raw material costs. The country’s Passenger Car Association Secretary General, Cui Dongshu said, “We should aim at fulfilling our production targets no matter how expensive raw materials become. Prices of every key raw material are rising, which may boost the battery recycling industry.”
Tesla’s global expansion provides it with something that few EV companies have, and that’s diversity to its income statement. Respective geographies may hold different economic circumstances, which means that Tesla isn’t reliant on the health of a single consumer base; this could add an appeal to Tesla’s stock for objective investors.
Wall Street’s Take
Turning to Wall Street, Tesla has a Moderate Buy consensus rating, based on 15 Buys, 7 Holds, and six Sells assigned in the past three months.
The average Tesla price target of $1068.40 implies 34.33% upside potential.
Concluding Thoughts
Tesla maintains its leadership position of the electric vehicle space. The firm has improved its revenue to CapEx while maintaining aggressive re-investment rates, which could lead to further gains in its operating margins. Tesla looks like an expensive stock at face value; however, its earnings growth rate is outpacing its stock price growth, suggesting that the market hasn’t priced in its full potential just yet.
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