Tesla Stock is still loved and hated. How to cut through the noise.


Tesla

generates a ton of debate, passion and controversy, and it seems fair to say that everyone has an opinion. So how should investors cut through all the noise?

Horse Barron’s, we tried to do that when we recently elected

Tesla

(ticker: TSLA) shares, after falling more than 70%, believe the stock looks attractive enough to enter despite some industry and Musk-related headwinds.

The choice has generated a lot of feedback, good and bad, along with almost everything written about Tesla, and we’d like to touch on some of it and the lessons we’ve learned from it.

The first lesson we learn is that Tesla fans and haters are a passionate bunch. In fact, everything about Tesla stock is overrated. Take the shareholder base. About 45% of the shares are owned by retail investors. For the parent of Google

Alphabet

(GOOGL), that number is about 15%. People love to trade with Tesla. In December, Tesla stock was valued at about $425 billion, about 3 billion shares, about 1.7 billion

apple

about $230 billion worth of stock (AAPL) changed hands. This is important because Apple’s market capitalization is nearly six times that of Tesla. There are many people who want to express their opinion on Tesla stock through buying and selling.

Analysts also have very different opinions. The difference between the high and low analyst price targets for Tesla stock is about $265, or about 240% of the current share price. This is about 10 times wider than the bull bear spread

Honeywell International

(HON) stock.

And take the lead. About a year ago, Elon Musk was Time magazine’s man of the year. Now he is not.

That kind of sentiment may be good for swing traders, but how Tesla fares in the long run will ultimately depend on its fundamentals. But there are plenty of people who believe Tesla is overvalued and its stock is a steal.

It’s probably in the middle. Shares trade at about 20 times less than estimated 2023 earnings

PepsiCo

(PEP) or

Walmart

(WMT). Tesla is expected to grow earnings by about 35% in 2023, giving the stock a price-to-earnings-growth ratio, or PEG, of less than 1.


S&P 500

The PEG ratio is close to 2.

Tesla is expected to generate approximately $12 billion in free cash flow in 2023.

Toyota Motor

(TM),

BYD

(1211. Hong Kong),

Volkswagen

(VOW. Germany),

Mercedes-Benz Group

(MBG. Germany) and

BMW

(

BMW
.

Germany). At $110, we like the price.

We love electric cars too, although we know not everyone does. Some even call it fashion. We don’t think so. Look at China. EV penetration of new car sales in China could rise to 25% in 2022. Citi analyst Jeff Chung predicts that EV penetration will rise again in 2023, reaching around 33%.

In the US, battery-electric penetration of new car sales in the US is less than 6% Battery-electric penetration of new car sales in Europe should end at around 12% in 2022.

If global EV penetration of new car sales were to reach around 30% to 35% by the end of the decade – where Chines EV penetration has been in recent months – EV sales would grow by an average of around 20% per year. the next seven years.

To reach those numbers, the cars simply have to be better. Electric cars won’t win because the government wants them. Electric cars will only win if they are better than the technology they replace.

Today, EVs are cheaper to run and fun to drive. Filling them can be difficult, something the industry needs to address with better infrastructure and technology.

Nor is electric cars an industry that behaves like a fad. Traditional automakers spend hundreds of billions on EVs, EV battery technology, and EV charging technology. More electric cars are showing up on dealer lots. The competition for Tesla is here, and it’s significant. Again, this is common knowledge. No one on Wall Street believes Tesla will maintain a 65% market share in the US

But even bearish estimates aren’t so bad for Tesla. Perhaps Elon Musk’s company will capture about 10% of industrial EV volumes in the long run. But even if it captures just one-tenth of the market, which has grown to 30% of new car sales by the end of the decade, Tesla will grow volumes by 15% annually over the next eight years. There is more growth to come.

What Tesla needs to keep its market share above 10% in the coming years is a cheaper car. The average car in the US costs about $45,000. The bulk of the industry volume is estimated at around $35,000. The average Tesla is worth close to $60,000 today.

Don’t underestimate autonomous driving, another hot topic for investors. Whether Elon Musk is over-promising about Tesla’s Fully Self-Driving program or whether Tesla can actually put someone to work while they’re asleep misses the point. The bottom line is that driver assistance features are improving and consumers are willing to pay for them.

Tesla announced in October that 160,000 of its North American customers are part of the company’s Full Self Driving, or FSD, beta program. This is a fraction of the people who have purchased the FSD software from Tesla, a top-of-the-line driver assistance product.

The FSD costs $15,000 and can be purchased after the car has already been purchased. The 160,000 in the beta program — again, only a fraction of Tesla drivers with FSD — represent $2.4 billion in high-margin sales.

Frankly, the rest of the industry is praying that Tesla is successful in selling the FSD software. Other automakers are looking to do the same with driver assistance features.

This is not an exhaustive list and the Tesla discussion will continue as new issues arise in the future.

The intensity of the debate makes Tesla stock prone to euphoric highs as well as debilitating lows. Bull and bear investors should try to remember that the truth about any issue often lies somewhere in the middle.

Let’s see if Barron’s managed to thread the needle.

Tesla shares rose 3.4% on Wednesday. S&P 500 and


Dow Jones Industrial Average

were 1% and 0.6%, respectively.

Email Al Root at allen.root@dowjones.com



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