Despite a daily loss of 2.08%, Tesla Inc (TSLA, Financial) has shown a promising 3-month gain of 22.09%. With an Earnings Per Share (EPS) of 3.53, the question arises: Is the stock significantly undervalued? This article presents a comprehensive valuation analysis of Tesla (TSLA), which will help investors to make informed decisions.
A Snapshot of Tesla Inc
Founded in 2003 and based in Palo Alto, California, Tesla is a sustainable energy company that aims to transition the world to electric mobility. The company sells solar panels, solar roofs, and batteries for stationary storage. It has a diverse fleet of vehicles, including luxury and midsize sedans, crossover SUVs, and plans to sell more affordable sedans, small SUVs, a light truck, a semi-truck, and a sports car. With global deliveries in 2022 exceeding 1.3 million vehicles, Tesla's current stock price stands at $214.66, significantly lower than the GF Value of $453.24.
Understanding Tesla's GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus' valuation method, Tesla (TSLA, Financial) is significantly undervalued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. Given its current price of $214.66 per share, Tesla's stock appears to be significantly undervalued. As a result, the long-term return of its stock is likely to be much higher than its business growth.
Assessing Tesla's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. It's crucial to review a company's financial strength before deciding whether to buy shares. Tesla has a cash-to-debt ratio of 3.97, ranking better than 80.87% of companies in the Vehicles & Parts industry. Based on this, GuruFocus ranks Tesla's financial strength as 9 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Tesla has been profitable for 3 years over the past 10 years. During the past 12 months, the company had revenues of $94 billion and Earnings Per Share (EPS) of $3.53. Its operating margin of 13.49% is better than 88.2% of companies in the Vehicles & Parts industry. Overall, GuruFocus ranks Tesla's profitability as fair.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Tesla is 36.4%, which ranks better than 93.67% of companies in the Vehicles & Parts industry. The 3-year average EBITDA growth is 83.9%, which ranks better than 97.27% of companies in the Vehicles & Parts industry.
ROIC vs WACC
Profitability can also be evaluated by comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Tesla's ROIC is 24.6 while its WACC came in at 19.48.
Conclusion
In summary, Tesla (TSLA, Financial) is estimated to be significantly undervalued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 97.27% of companies in the Vehicles & Parts industry. To learn more about Tesla stock, you can check out its 30-Year Financials here.
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