Tesla earnings growth justifies its valuation, here’s the data

[lyn244]

Hey /r/investing,

I am here to point out that at the moment, Tesla is the most undervalued tech/teracap (stocks that are or were once worth $1 trillion) stock measured by price to earnings growth. All the data will be here in this post.

But first, I want to address some folks here who think Tesla is overvalued because the P/E is 189 (which is down from 1,100 at the end of last year due to blistering fast earnings growth and will be under 100 if Tesla doesn't grow earnings from it's Q4 pace) while American automakers like Ford and GM have P/E around 12 and 7 respectively. Be prepared for some data.

Tesla is not like Ford or GM and shall not be valued as such. The only similarity is that a majority of revenue comes from cars. However, Tesla is growing revenue much more like a tech company than a car company like for or GM. Tesla also has much higher margins than Ford and GM, and virtually no debt. They are also already 100% EVs while Ford and GM have to transition their sales to EVs. Here's the data :

Tesla Revenue growth versus tech and cars

Company
Years to grow from $10B to $50B
Years to grow from $10B to $100B

Facebook
4.25 years (2014-2018)
6 years (2014-2020)
Tesla 4.5 years (2017-2021) Estimated ~5.75 years (2017-2023)
Apple
5 years (2005-2010)
6.25 years (2005-2011)

Amazon
5.25 years (2006-2012)
8.75 years (2006-2015)

Google
6.75 years (2006-2013)
10.75 years (2006-2017)

Microsoft
10.5 years (1996-2007)
21 years (1996-2017)

General Motors
17 years (1960-1977)
28 years (1960-1988)

Ford
21 years (1964-1985)
24 years (1964-1988)

Clearly, Tesla is not like Ford and GM if it is growing 4-5x faster than GM and Ford in their heydays. Tesla is growing faster than even its tech company rivals.

Tesla net margin versus GM/Ford

Company
Q4/Q3 Net Margin
Notes
Tesla 15% Added back one time expense of CEO payroll taxes $340M
General Motors
8.9%


Ford
5%

Tesla is 2-3x more profitable than GM/F, and still expanding margins at a rapid pace. What's more, Tesla posted $2.32B in profits in Q4 2021 ($2.67B if you exclude the 1 time $340M payroll tax for Elon Musk's compensation package), while Ford and GM are expected to post ~$1.8B profit each for Q4 2021. Tesla has already surpassed Ford and GM's global profits (not margins, actual $) despite selling a fraction of the cars and still growing rapidly and expanding margins.

Tesla Debt & Cash versus GM/Ford

Company
Debt (short and long term)
Cash
Notes
Tesla $1.4 B $18.967 B Excluded finance/leasing debt, included marketable securities & bitcoin
General Motors
$16.848 B
$ 23.940 B
Excluded finance/leasing debt, included marketable securities
Ford
$24.007 B
$46.426 B
Excluded finance/leasing debt, included marketable securities

Tesla has almost no debt burden compared to the heavy burden at GM/Ford.

Given this data, it is clear that Tesla's peers are not car companies, the peers are tech/teracap companies. Why is this a fair comparison despite the fact that most of Tesla's revenues come from cars, not tech? Some might say Tesla's cars contain a ton of tech and Tesla sells software for the cars and makes large amounts of money from it. I would say just look at the numbers. What industry a company is in does not actually matter for valuation, all that matters is growth, profits, and sometimes debt.

And now what you've been waiting for...

Most people here know that Tesla's price to earnings ratio (stock price divided by earnings/profit per share) is 189 and ~100 (note this is based on GAAP financials) if you take the current earnings annual run rate in Q4 and think that this is astronomical. Well, Tesla's multiple is that high because you will always pay a higher price to earnings multiple for a companies that are growing fast. We can adjust companies forward (next year) price to earnings multiples by how fast they are anticipated to grow their earnings, and I have done exactly that in the table below for Tesla and other tech/teracap stocks:

Company
Stock price
2021 Analyst consensus EPS (Non-GAAP)
2022 Analyst consensus EPS (Non-GAAP)
2022 growth
Forward Price to Earnings
Price to earnings growth 2022

Facebook
$311
$13.94
$14.24
2.15%
21.82
10.14
Google
$2,697
$108.64
$114.13
5.05%
23.63
4.68
Apple
$173
$6.04
$6.51
7.78%
26.64
3.42
Amazon
$2,892
$41.10
$49.41
20.22%
60.35
2.98
Microsoft
$309
$9.37
$10.77
14.94%
28.68
1.92 Tesla $935 $6.78 $10.78 59.00% 86.71 1.47

As shown clearly in the table, Tesla has the lowest price to earnings growth ratio of all the tech/teracap stocks at 1.47. It is true that Peter Lynch, who invented the price to earnings growth ratio, suggested that a price to earnings growth ratio of 1 represents a fairly valued company. However, Peter Lynch suggested that in 1989 when the average 10 year govt bond yield over 20 years was >8% compared to

 

[joyjoy1001]

@lyn244 You're comparing a company still in the upwards part of their curve with much more mature firms. This mode of analysis exactly omits the most important question, which is where their earnings end up, and how high it would have to get to justify the P/E, which is a sizable fraction of the entire global car market.

 

[enlightenmusic]

@joyjoy1001 This is the correct take and the OP lacks any nuance. Just more mental gymnastics used as confirmation bias.

 

[lyn244]

@joyjoy1001 The steepness of growth is normalized out in a PEG ratio because the steepness of growth means a higher P/E ratio and obviously a high growth rate. So it’s considered in both the numerator and denominator and therefore cancels out/normalizes out. The PEG ratio is specifically designed so that you can compare companies at different stages in their growth cycle, while P/E is not

 

[joyjoy1001]

@lyn244 See, I don't read that as justification for PEG, I read that as screening out useful information. You're deleting crucial context to make a cleaner derivative value, without plugging that number back in to see how it works in the larger picture.

Where do you see Tesla's earnings in 10 years? 20?

 

[lyn244]

@joyjoy1001 In the hundreds of billions. Tesla is like Apple but with a 10x bigger TAM

 

[joyjoy1001]

@lyn244 Are there historical precedents for a company with that share of global revenue?

 

[hadewhole]

@joyjoy1001 Not really, no.

Ford, a century ago with the Model T, kind of, but even still not really.

That's a not-insignificant part of what makes Tesla so amazing.

 

[joyjoy1001]

@hadewhole You’re speaking in the future tense right? My point is that Tesla would need to reach unprecedented levels of dominance to justify its stock price at current valuations. If you’re baking in that assumption, then sure, but betting on a historical anomaly is not what I would call proper analysis.

You can be bullish on Tesla and still think the stock is overpriced. I am.

 

[bren0628]

@joyjoy1001 Who is your 10-year auto play?

 

[hadewhole]

@joyjoy1001 Present tense. No other model in history has grown sales as fast as Model 3, except the Model T. Model T and Model 3 growth ramps are near-identical.

 

[maryslittleflower]

@joyjoy1001 Toyota and VW have proven that companies can touch 10mm annual units. If Tesla can do that with both a higher ASP and higher margins it'll be disgusting. And I think they don't stop there. I think they break that line and climb towards 20mm. Who knows if they make it exactly but I think they'll end up closer to 20mm than 10mm.

And they have other revenue streams that no one else can touch. Storage, FSD, insurance, and possibly robotics now.

They're THE company to watch for the 2020's and 30's.

 

[joyjoy1001]

@maryslittleflower And what would their revenue and earnings be like at that volume? What EPS would they hit, and what would their share price be at ‘normal’ P/E valuations?

I’ll say it again: Tesla can have an absolutely jaw dropping historically great decade and it still would not produce earnings commensurate with its current stock price.

 

[chocostar]

@joyjoy1001 This may help if you're willing to watch

 

[mmusa83]

@maryslittleflower Does Tesla want to expand production that much? I get the feeling that much of their success and appeal is that their cars are still somewhat unique on the road. Do they lose major appeal if you see Tesla vehicles all over the roads?

 

[maryslittleflower]

@mmusa83 Their stated goal is 20mm by the end of the decade. I'll give them an extra two years due to Elon-time.

People want peppy EVs that are reliable, efficient, and avoid the dealership model. Things like playing games and watching Netflix on the screens, FSD, Supercharger network, all are bonuses.

 

[mmusa83]

@maryslittleflower Gotcha, I appreciate the reply. I’m pretty new to the game.

 

[loveisgod7788]

@lyn244 whats apple net margin compared to tesla? you can lump fsd and robots into pure speculative plays, because if not, fb with metaverse, quantumscape with its solid state batteries all should get enormous valuations for potential

 

[jencrow2451]

@joyjoy1001 When Tesla is a mature company, it will be running the world. I’d argue it’s highly likely that Tesla never stops expanding into different industry’s, while disrupting the shit out of every one it enters.

They do cars right now, by the end of the decade this will not be the case

 

[blondgrrl]

@jencrow2451 For the life of me I do not understand how that prick has this effect on people? It’s more mind boggling than trump