Tesla shares have been defying gravity and it’s not like analysts are advising investors to be cautious.
Analysts keep ratcheting up that price target on Tesla. NewStreet Research just raised its price target on the stock from $530 a share to $800. Before we dive into how analyst Pierre Farrago gets there, let’s review his case first.
As reported by TheStreet’s Nelson Wang, it’s not just Tesla’s improving cost structure and margins, its outlook for consistent and growing free cash flow and its recent track record of production execution that gets Ferragu to $800. “Tesla’s dominance in technology is real,” Ferragu wrote in his note, which shows a particularly bullish case for Tesla’s total addressable market.
Here’s how it breaks down:
Ferragu is confident in his long-term estimates. The further out in a valuation one looks, the more subject to change the estimates are. But Ferragu firmly believes Tesla can deliver 2 million to 3 million cars in 2025. For reference, a relatively bullish Dan Ives at Wedbush Securities, with a bull case of $600, sees Tesla delivering just over 1 million cars by 2025. The electric vehicle market is expected to grow aggressively. With maintained confidence in total EV sales worldwide and confidence in Tesla’s ability to maintain its high market share, maybe the company can get to Ferragu’s delivery estimate.
With an expected average selling price of between $40,000 and $50,000 and deliveries of between 2 million and 3 million, auto revenue alone could hit $120 billion ($33 billion expected in 2021, according to FactSet consensus estimates).
If Tesla can get to operating margins of 10% to 15%, as Ferragu estimates, earnings-before-interest-and-tax would between $14 billion and $25 billion. Currently, Ferragu uses an enterprise value-to-EBIT multiple of just above 27, in line with many growth tech enology hardware companies. By 2025, Tesla’s growth curve will likely start flattening, justifying a more normalized multiple. Farrago arrives at an enterprise value of $200 billion, which is anywhere from 8 times to 14 times his range of estimates for 2025 EBIT.
As Wang reported, here’s the crux of what enables Ferragu to be so bullish on Tesla's market share: “the game-changing innovation Tesla brings to the premium segment of the market attracts new buyers to it,” Ferragu said. In other words, Tesla is so innovative, it creates demand, rather than feeding off of it.
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