Is Tesla stock worth $180 a share?
Probably, if the company keeps growing and Musk remains motivated
Tesla shares trades at a premium multiple reflecting blistering growth and the admiration investors have for Elon Musk, the company’s brilliant leader. Hopefully, despite the woefully flawed judgment of Justice Kathaleen McCormick of the Delaware Chancery Court nullifying his incentive compensation scheme put in place in 2018 when the stock was a tiny fraction of today’s share price, Musk will remain motivated to apply his considerable talents to building his fine company.
The world market for light vehicles comprises about 70 million units and is growing slowly with the world economy. It is in my opinion the most competitive market on Earth. Tesla vehicles today hold somewhere around a 2% to 3% share of that market but I now see them everywhere and I think a reasonable projection would see the company (despite the intense competition) use its early mover advantage and excellent cost structure to build share to somewhere around 10 to 12% over the coming five or six years. That would put Tesla in the same volume league as Toyota, Volkswagen and GM who will fight ruthlessly to hold their own share of market, and still likely smaller in total volume than fast growing Chinese EV makers like BYD who have a good shot at a commanding market share in Asia and ultimately India, Africa and Europe if not in America. The shakeout of weaker players will be brutal and take no prisoners.
Against that background, assume Tesla can keep growing at the rate of 1 million vehicles a year in slow growth market and maintain the cost disciplines that have produced margins Tesla’s competitors can only dream of. The arithmetic of this simple (and undoubtedly flawed) model is that Tesla revenues will grow by about 20% compounded through 2029, with the rate of growth tapering off in later years but still double digit. I am assuming Tesla can produce its vehicles for an average of $32,000 (it was $36,708 in 2023 but Tesla plans a lower cost model and has a great record of reducing costs) and a steady price per vehicle of $40,000 which across its fleet would be competitive at most trim levels. Some vehicles would sell for $100,000 and some for $25,000 or something like that. I have excluded sales of the Tesla semi transport vehicles for simplicity.
Assuming a price to earnings multiple of 40 X in 2024 decling to a still premium multiple of 27 X in 2029 (versus a market multiple in the 20 X range) I can envision Tesla shares having a 2029 value of about $340 a share. That would produce an annual return (excluding any dividends) of about 10%, more or less what the return on the S&P 500 should be. Basically at a price of $188 (more or less) today, the market is pricing Tesla correctly to produce a market return. That is what markets are supposed to do.
New products, success with the semi Truck, additonal services such as Robo Taxi and self-driving capability are the sauce on this steak and augur for a higher valuation, albeit with considerable risks, including the risk that Musk might just pack it in after having his 100% at risk compensation overturned by a leftist judge who lacks the common sense to realize that Musk’s package if paralleled by a similar package for Mary Barra of GM or Jim Farley of Ford would have seen these peer CEO’s working for free since 2018.
I think a small and sensible holding in Tesla in a technology portfolio makes sense and is not likely to do worse than the other members of the Magic Seven.
No at most $60