Tesla | Fundamental Analysis | MUST READ...

In October, Tesla's stock price climbed above $1,000, and its market capitalization surpassed $1 trillion. This situation has probably made many Tesla investors excited about the growth. Of course, many who have not yet caught this "flight" wonder if it is too late for them to benefit from this constantly growing stock.

Let's discuss whether or not buying Tesla stock at this point makes long-term sense.

Many traditional market observers find Tesla's stock valuation rather perplexing. The company has a market capitalization of $1 trillion, more than the combined valuation of half a dozen leading car companies. In fact, it is more than 1.5 times the combined market capitalization of Toyota, General Motors, Ford, Volkswagen, and Daimler.

Tesla's P/E and price-earnings-growth (PEG) ratios look high compared to those of other automakers.

Add to this estimate the fact that the top five automakers together sold about 40 million cars in 2020, compared to the roughly 500,000 Tesla sold, and the bewilderment of market analysts seems understandable. So, what should you, as an investor, learn from Tesla stock's impressive rise, and more importantly, how is Tesla stock likely to behave going forward?

One common argument given to justify Tesla's valuation is that it is more of a technology company than an automaker, and therefore should be valued that way. This argument does have a grounding in fact. Electric vehicles (EVs) are not new. They have been around for over a hundred years. But the abundance of gasoline and the constant development of internal combustion engines have limited the commercialization of electric vehicles. It is generally accepted that electric cars began to make a comeback in 1997 with the introduction of the Prius from Toyota.

However, even after that, for almost two decades, no major automaker was able to produce (or even interested in producing) electric cars on an industrial scale. In 2003, Tesla, as a start-up company, took on this daunting task. It is to this company's credit that its improved technology has made electric cars mainstream. If we look at Tesla as a technology company, its valuation makes some sense.

While Tesla's forward P/E ratio is higher than even leading technology stocks, its forward PEG ratio seems more sensible. The forward PEG ratio takes into account the company's projected growth in addition to earnings. Therefore, it gives a more accurate picture when comparing businesses developing at different rates. This brings us to the next factor that supports Tesla's stock growth.

Tesla expects an average annual growth rate of 50% in vehicle deliveries over the "multi-year horizon." Indeed, Tesla's growth rate is achievable as it starts from a much smaller base. In the last quarter, its revenues grew about 98%, which wasn't even the fastest growth in the last quarter. But in the three years leading up to the second quarter of 2021, its quarterly revenues grew at an average annualized rate of more than 50%.

By comparison, over the same time period, the highest average growth rate among the leading automakers was 6.4 percent for Volkswagen. Similarly, in the third quarter, Tesla's revenues grew 57% year over year. By comparison, revenues at Ford, General Motors, and Volkswagen declined year-over-year in the third quarter. Moreover, Tesla's operating margins in recent quarters are also higher than most of its competitors.

Tesla's operating margin rose to 14.6 percent in the third quarter. Tesla is well-positioned to continue its revenue growth in the next few quarters. It is increasing its production capacity to meet growing demand. This, in turn, should support its stock price in the coming quarters.

In the long run, Tesla's stock price may rely on its ability to make money beyond selling cars. The biggest potential area of focus, of course, is software for Full Self-Driving (FSD).

Despite all that Tesla has accomplished in producing cars, the valuation of its stock takes into account what the company could potentially achieve, especially in the area of autonomous driving. Tesla enthusiasts see several other areas of growth - auto insurance, battery, and power supply manufacturing. But none of these seem potentially as big as FSD.

Tesla buyers can now join the beta testing of the company's FSD software. The company plans to offer it only to select customers based on their past driving performance. The company has a treasure trove of data on Tesla drivers, covering such things as sharp braking, aggressive cornering, etc. Tesla continues to gradually enhance its autopilot and FSD features. As it rolls out features to more customers, it gets more data flowing into its machine learning models, thereby further improving the software.

If Tesla can implement autonomous driving features that are better than its competitors, its stock price could rise in the long run. Looking at its track record to date, Tesla stands a good chance of accomplishing this feat.