As we look at Tesla today, the situation mirrors late-2019: Tesla was about to open the Shanghai plant, which doubled capacity, and launch Model Y, which doubled the company’s total addressable market (TAM). When Tesla opens plants in Berlin and Austin, Tesla’s capacity will double again. The Model Y launch in Europe will double EU TAM (EU represents 20% of Tesla’s volume) and also puts Tesla vehicles closer to price parity with EU manufacturers, since there will be no import tax or shipping. We anticipate 2022 volume growth of 60%+ despite the fact the Cybertruck has been delayed until end of 2022.
In the US, the Biden administration’s US EV tax credit for eligible buyers is expected to be $7.5K-$10K and pass by late September. This will put Tesla at “EV credit parity” with other automobile manufacturers in the US, since currently, Tesla purchases don’t qualify for the EV credit as its $200K cumulative EV cap has been fulfilled.
Earnings and Stock Price Estimates
In our opinion, Street volume and earnings estimates for Tesla for 2021 and 2022 are too low. We expect earnings per share (EPS) to come in around $5.60 for 2021 and $9.80 in 2022 vs. the Street estimates of $5.30 and $7.30 respectively. Once Berlin and Austin open, we expect Wall Street to boost its volume and EPS estimates for 2022 and beyond.
Over the next 6-12 months, our TSLA price target is $1,100, rising to $1,600 by 2025; this includes $0 for Robotaxi. In contrast, Ark Investment Management’s price target is $3,000 in 2025, which includes $1,500 for Robotaxis. We add no incremental value for Robotaxi (other than value from the $10K upfront cost as an option) because several US and Chinese competitors are already testing EVs with Level 4 autonomous driving capabilities while Tesla remains at Level 2. By 2025, we expect all automobile manufacturers to offer Level 4 autonomy, which would imply no incremental value for Robotaxi.
TSLA 5-YEAR FORECAST 2021-2025 9/10/2021
In our TSLA five-year summary forecast, we see volumes growing from 860K in 2021 to 5.0M in 2025, which has the potential to increase the company’s EPS from $5.60 in 2021 to $32 in 2025. At a 50x price to earnings ratio (P/E), which is consistent with 18-20% EPS growth 2025-2030, we estimate a $1,600 share price by 2025. Discounting this back at an 11.6% cost of equity (2% 10yr Treasury yield, 6% equity risk premium and a 1.6x beta = 11.6%) equates to a price target of $1,100.
Investment Controversy
Electronic vehicle (EV) adoption is surging globally — from 3% in 2020, to 5% in 2021, to an estimated 25% in 2025. That alone may drive 50% compounded Tesla volume growth between 2020-2025, assuming Tesla can hold EV share as EV adoption rises.
The Tesla investment controversy continues to be whether Tesla will lose EV share as internal combustion engine (ICE) competitors ramp up EV development efforts and reallocate $30B in advertising spending toward EVs. That’s been the debate for three years, and during that time Tesla’s EV share has grown from 17% in 2017 to 23% in 2020 and 24% YTD in 2021. What’s changed? Competitors are now poised to leverage the equities of best-selling branded products like the Ford F-150 and Porsche Macan and extend those brands into the EV space.
We also expect Tesla debt to be upgraded to investment grade after year-end, as Tesla’s cash and
free cash flow (FCF) overwhelm Tesla’s debt ($17.4B cash including Bitcoin vs. $7.6B debt. We forecast $4B FCF in the 2nd half of the year and $11B FCF in 2022). Many investors may miss the significance of Tesla being accorded an investment grade credit rating, which will reduce or eliminate the need for further equity raises as Tesla ramps up capacity between 2021 -2025.
The Opportunity
We expect Tesla stock to continue to move higher as fiscal year 2022 volume and earnings estimates are increased once the new Berlin and Austin facilities open in the fourth quarter. We believe investors are overestimating the negative impact of new EVs from competitors given Tesla’s expanding EV TAM as it launches Model Y to Europe, and as local EV production brings Tesla EV prices down closer to its European competitors. We believe the $7.5K-$10K US EV credit will act as a price cut for Tesla vs. others who already benefit from the current $7.5K EV credit. Finally, we believe investors are underestimating the 2023-2025 volume and earnings upsides as the Tesla Cybertruck and $25K Tesla subcompact launch globally.
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