Elon Musk wants to go the moon and must think Tesla, Inc. (TSLA) is headed there too. The unconventional Chief Executive Officer (CEO) recently bucked up nearly $10 million to buy his electric car company. Musk has opened his checkbook five times since March 2017.
Every one of the previous purchases was under $350. This time around, he paid $767. If the previous pattern of Tesla heading higher after Musk buys holds, where could the stock be headed?
Well, TSLA is well above Wall Street’s 12-month price target of $492.33.1 Analysts expect Tesla to generate sales of $41.29 billion in 2021 with earnings per share (EPS) of $13.79.
In the last five-years, TSLA has traded at an average of 5.18 times sales (P/S). If analysts are correct that Tesla will sell $41.29 billion worth of electric vehicles in 2021 and trades at its average P/S ratio, then TSLA shares would price out at $1,385 or 73% higher than $800ish.
During the last half decade, investors paid a minimum of 1.42 times sales and maxed out at 9.81. At those numbers, TSLA’s price tags, based on 2021’s projected sales, would be $380 to $2,622. Today, Tesla is valued at six times revenue, which would price out at $1,604. 2
One of the things we’d like to see Tesla do is reduce their costs. They’ve failed to turn a profit because they spend more than they make. According to 2019’s annual report, total operating and costs of revenue were 100.28% of revenue. In 2018, the number was 101.81%. So, it’s coming down incrementally. We would like to see it fall dramatically.
For 2021, analysts forecast earnings per share (EPS) of $7.99.3 Using the sales estimate of $41.29, we can back into Wall Street’s expected net margin. Based on the current number of shares outstanding of 184.39 million, Tesla’s predicted net margin for 2021 would be 2.99%.
Looking at the rest of the world’s more recognizable car manufacturers, 2.99% would be the second lowest behind Mazda’s five-year average of 2.73% and way behind Subaru’s leading 7.78%. Meanwhile the average of our list of 10 auto makers is 4.94%.
Considering Tesla is a luxury brand, they should be able to generate better margins than more established mass appeal manufacturers. If Elon Musk and team can cut their costs enough to get to the middle of the pack, around 4%, then EPS for 2021 would shoot up to $10.69 per share. Blowing past Wall Street’s expectations by that magnitude would likely result in investors paying a major premium for Tesla Shares.
Outlook: Tesla, Inc. (TSLA) offers investors a decent return to risk ratio in the next 18 to 24 months based on its expected 2021 revenue and its historical P/S ratio. If the company traded at its five-year low P/S ratio, downside would be about $420 from its current level of $800. Upside to the average price to sales valuation would be $585, which is roughly a 1.4 to 1 reward to risk. If investors hold the current P/S firm, then the stock would double and offer a 2 to 1 potential gain to loss relationship.
CEO Elon Musk has taken a position on which way the stock is likely headed. His insider buying track record suggests he’s more likely to be right than wrong. Considering Tesla’s potential reward to risk scenarios outlined above, TSLA could be appropriate for longer-term growth investors with above average risk tolerance.
1 – https://finance.yahoo.com/quote/TSLA?p=TSLA&.tsrc=fin-srch
2 – https://finance.yahoo.com/quote/TSLA/key-statistics?p=TSLA
3 – https://finance.yahoo.com/quote/TSLA/analysis?p=TSLA