Tesla's worth has increased by $440 billion in the last month alone, equivalent to the combined market capitalization of Ford, General Motors, and Toyota. Tesla shares started to reflect the dangers this week, falling 13% on Tuesday after falling 5% on Monday. Musk seems to have devised a devious technique to circumvent this issue. Instead of announcing a stock sale, he ran a Twitter vote to determine if he should sell 10% of his Tesla ownership. When the Twitterati dutifully voted for him to sell his shares in the electric-car producer, the topic of whether this is an insider signal regarding the share price became complicated.

The Bear case (sell)

Tesla is the original meme stock, backed by people who have made a fortune by following Mr. Musk and who don't take well to anybody who disagrees. The company's worth is not based on sales this year or next year, but on future sales and earnings prospects. The unpredictability of the very distant future allows for the conjecture that meme traders enjoy.Tesla is valued at $1.3 million for each of the 900,000 or so vehicles it is expected to deliver this year. Mr. Musk has attracted followers who not only purchase, but actively advocate Tesla shares, regardless of the realities of sales, competition, margins, subsidies, or anything else.

Tesla is also on the side of governments and investors that have pledged to take action to cut carbon emissions. However, suppose the share price movement was due to Tesla outperforming the gasoline-powered competition. In that case, conventional competitors' shares should be suffering. Instead, the value of rival automakers has climbed in tandem with Tesla's shares.

None of these trends are dependable, even though they all have the potential to go much higher. Meme stocks are prone to wild fluctuations in price. Long-term bond rates might readily climb again if investors believe in the economy's revival. And as the industry grows, investors who have invested in the prospect of electric vehicles will begin to expect actual sales and profits.

The Bull Case (hold/buy)

Growth and potential

Tesla is a growth machine, it increased revenues by 75% CAGR for the past 10 years, and analysts expect to keep growing at a 29% CAGR for the next 5 years. So, of course, the current valuation is future-looking, and the market itself is built that way. I think 29% for the next 5 years is pretty conservative, given it is full of optionality. Apart from its Apple-like car accessories ecosystem ( from wall connectors to adapter bundles), it sells pretty neat solar roofs. Shopping Tesla e-commerce actually reminded me of Dyson, the inventor and brand, who sells vacuum cleaners, air purifiers, and everything in between. Tesla has the DNA for superior design and innovation, and it is much more than a car brand: it is a lifestyle brand. They even have their own branded apparel lineup (very limited, though). Lastly, Tesla started testing data-driven insurance  for Tesla's owners in 2 US states and will soon expand. This gives a lovely recurring subscription model to its bottom line. It also projects to build an entirely new business around Autonomous Ride-Hailing.

Moat

Tesla's Model S Plaid, the most advanced version of their luxury sedan, accelerates from 0 to 60 mph in less than two seconds and boasts 1,020 horsepower. This is in the top range of the luxury automobile market at the lowest price, which sums up Tesla's technology edge. Tesla's electric car production expertise enables the business to produce automobiles at a lower cost than rivals. How could they disrupt so much the car industry behemoth? Because it turns out that manufacturing an EV is quite different from a traditional car. It's like learning to walk again for incumbents. Start with the engine, an average combustion engine has 2000 moving parts, while an EV Engine has just 20. Still, Telsa is the king of the hill in battery and software, and this moat is not going away anytime soon. Tesla started investing in its own battery capacity back in 2014. VW says its battery manufacture will not be operational until 2023. But this is not all; they also innovate on other parts of the manufacturing, such as the car frame building. Tesla's large foundry machines, Giga Press, facilitate the manufacturing process of the Model Y's rear subframe, reducing the number of parts from 70 to one. Last but not least, Tesla's brand power is broad, and Brandirectory puts it in the top 10 of its automotive brand value ranking.

Financial strength

Debt levels are manageable, Free Cash flow is pouring and growing at a high rate. Return on invested capital is at a sound 12% and has steadily increased each year for the past 10 years.

Grit / Skin in the Game

Elon still owns 17% after selling some of its shares last week. The company vision is dope ("accelerate the world's transition to sustainable energy"). But Glassdoor ratings show there are improvements to be made in terms of work-life balance culture. Still, Tesla and Musk magnetic brand is a must when competing with all other manufacturers trying to hire electro-chemistry people in short supply.

Aaaaaand valuation...

Ok here comes the really controversial part. For that kind of high-growth high-optionality business, I prefer to measure market expectation built in the stock price instead of putting an exact value on the company. I do that by calculating the next 5 years implied growth by assuming price to free cash flow will fall back to its last 10 years median. If the company median is too frosty, then I fall back to the industry median. I also discount the "required rate of return", or opportunity cost of capital, at 10%. Price/FCF is now at 373, and the Software industry median is 28 (I use software because of the tech-heavy Tesla present and future value prop.) This implies the market expects Tesla to grow its Free Cash Flow (not sales) at an average 95% a year for the next 5 years. Is this plausible? If we look at the past 3 years, it's pretty reasonable as it grew more than 100% each. What do analysts think of future FCF growth? The average forecast is 102% FCF CAGR in the next 3 years... Ark invest thinks it will be worth $3000 per share in 2025 after all.

Verdict

Tesla is a meme stock to a certain point. Yes. I even labeled it "moon shot" in my portfolio. But, it is hell stronger in almost any possible business metrics than the real meme stocks like GME.

It is pricey but not too crazy either for all the reasons listed above. I invested a small position in Tesla in 2020, which grew by more than 600%. If it was more than 10% of my total portfolio today, I could not sleep. Still, it sits at less than 1%, so I will keep riding the electric wave and hold for now, even if it does not seem to be the most popular move for my eToro followers.

More action from my portfolio

If you liked this analysis, you might be interested in a few more selling and buying I made in the past week (paying members only, thank you for your support!), including Pinterest ($PINS), Chegg ($CHGG), Fastly ($FSLY), Salesforce ($CRM), Freshpet ($FRPT) and Amazon ($AMZN). If you prefer autopilot mode, you can do it with the copytrader feature on the eToro social trading platform. Here is the link to my popular investor profile.

The author of this post owns shares of TSLA. The Rookie Investor has a disclosure policy. This article by The Rookie Investor is not a financial advice as it does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content? Get in touch with us directly.