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Tesla Stock Valuation: A Debate Between Value and Growth Investors

3 Mins read

Tesla, the renowned maker of electric vehicles, has been a subject of much debate among investors. While Gordon Johnson, an analyst from GLJ Research and a well-known Tesla bear, believes that Tesla’s stock should trade more like Ford Motor stock, this is unlikely to happen anytime soon. However, Johnson’s perspective gives investors an interesting point to ponder.

Johnson recently revised his price target for Tesla stock to $23.53 from $24.33, maintaining a Sell rating. His target is based on comparing valuation multiples for Ford and its peers and adjusting for Tesla’s exceptional growth in the market. He applies this adjusted multiple to his earnings estimates, using a 15-times multiple for his projected 2025 earnings of $1.71 per share. Notably, this multiple represents nearly 250% of Ford’s estimated multiple based on 2025 figures, as per FactSet data.

Naturally, Tesla’s growth warrants some premium. Over the past decade, Ford has achieved a modest sales growth of around 2% annually. In stark contrast, Tesla has experienced an impressive average annual sales growth of approximately 44%.

Although Johnson’s reduced target price draws attention, it is the magnitude of the drop implied that truly stands out. This drop would amount to nearly 90% based on recent trading levels, which is both shocking and severe. However, other Wall Street analysts do not share Johnson’s perspective. In fact, FactSet reveals that the consensus earnings-per-share estimate for 2025 is $4.71 among analysts, significantly higher than Johnson’s projection.

The overall average analyst price target for Tesla stock stands at around $237, implying a valuation of roughly 50 times estimated 2025 earnings.

However, the debate surrounding Tesla’s stock valuation and whether it deserves a multiple of 15 times or 50 times earnings by 2025 is ultimately irrelevant. These differences in opinion reflect the philosophical divide on Wall Street. Johnson prefers to evaluate Tesla as a value-oriented automotive investor, while most Tesla shareholders belong to the growth investor camp and view Tesla as a technology-holding company.

It’s no surprise that these two types of investors rarely see eye to eye. Value investors insist on incorporating larger safety margins when valuing stocks, while growth investors prioritize investing in companies with rapid earnings growth, often dismissing slow-growing companies with low price-to-earnings ratios. After all, history has taught us that earnings growth is usually the key driver of stock market gains.

In conclusion, the clash of philosophies regarding Tesla’s valuation will likely continue, but investors should carefully consider both sides of the argument when making investment decisions in this highly-discussed automotive and technology hybrid.

Value vs Growth Strategies in the Stock Market

Both value and growth strategies can be effective in the stock market. However, there are distinct differences between the two approaches. Value investors prioritize finding stocks that are undervalued, often avoiding those with high price-to-earnings ratios. On the other hand, growth investors focus on companies with high potential for future growth, emphasizing the rate of change in growth rather than valuation.

When it comes to Tesla stock, there are some concerns for growth investors to consider. The prices of electric vehicles (EVs) are decreasing, leading to diminishing profit margins for Tesla. Furthermore, the global EV market is becoming increasingly saturated with competition. Additionally, it should be noted that Tesla doesn’t have a new mass-market EV planned for release until at least late 2024.

Despite these challenges, the future outlook for Tesla is not entirely bleak. The stock market always looks ahead, and the current uncertainties are already partially reflected in Tesla’s performance this year. As of midday trading Tuesday, Tesla shares were down about 14% year-to-date, while the S&P 500 and Nasdaq Composite had both risen by approximately 2%.

According to Gary Black, co-founder of the Future Fund Active exchange-traded fund, Tesla’s stock could see an upswing this year if profit margins improve in 2024 and the company manages to deliver around 2.1 million or 2.2 million units.

It’s worth noting that Gary Black’s stance as a growth investor sets him apart from those who may analyze the stock from a different perspective.

The extremity of the Tesla situation becomes apparent when comparing it to other tech stocks known as the “Magnificent Seven.” While the ratio of the lowest analyst price target to the average target for these non-Tesla stocks is around 70%, this ratio for Tesla, based on Johnson’s target price, is merely 10%.

This extreme disparity underscores the unique position of Tesla within the market. The other members of the Magnificent Seven, including Alphabet, Meta Platforms, Nvidia, Apple, Microsoft, and Amazon.com, are more traditional tech companies that do not directly compete with century-old manufacturing firms in the rust-belt region, which typically have lower single-digit price-to-earnings ratios like Tesla.

In conclusion, while the outlook for Tesla may seem uncertain at present, it is important to consider the distinctiveness of its market position and the potential for future growth. The stock market always evaluates prospects based on future expectations, and improvements in profit margins coupled with successful product deliveries could lead to a positive performance for Tesla this year.

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