In the past I've made multiple posts on Tesla's valuation (here, here and here).
Previously I did them after Q1 and Q3, but because the last few months have been such a rollercoaster for $TSLA and it probably makes more sense to do them after the full year numbers anyways, I decided to do this one a little bit earlier. In the future I'll just be doing them after H1 and H2.
Looking back
Since my first projections started with 2022, this is the first time we can compare my projections to Tesla's actual results. As such, I figured it'd be interesting to assess how far off my projections were.
Combining the bear and bull cases for 2022 of each post into a table together with the actuals:
Sales
| Part 1 | Part 2 | Part 3 | |
|---|---|---|---|
| Bear | 1,400,000 | 1,400,000 | 1,350,000 |
| Bull | 1,700,000 | 1,900,000 | 1,500,000 |
Actuals: 1,313,851
In terms of unit sales, my projections were definitely too optimistic. Tesla ended up slightly underperforming my bear cases, although a caveat here is that Tesla had 60K cars in transit at the end of 2022 and missed out on ~75K units due to COVID shutdowns in China. Without these one-time occurrences, they would've ended the year on ~1,450,000 units above my bear cases but still significantly below my bull cases.
That said, accounting for force majeure is supposed to be part of the bear case, so I need to be more conservative here in the future.
ASP
For ASPs, I projected $50,000, $55,000 and $54,000 respectively. Actuals came in at $54,385, so I was pretty much spot-on.
Revenue
| Part 1 | Part 2 | Part 3 | |
|---|---|---|---|
| Bear | $70B | $77B | $73 |
| Bull | $85B | $105B | $81B |
Actuals: $71B
Because unit sales fell short, but ASPs were correct, revenue also fell slightly short. That said, it wasn't off by a lot.
Operating Margin
| Part 1 | Part 2 | Part 3 | |
|---|---|---|---|
| Bear | 14% | 19% | 17% |
| Bull | 14% | 22% | 19% |
Actuals: 17%
Here I underestimated Tesla's margins a bit in Part 1, but overestimated them after the huge beat in Q1 2022. Ultimately it was pretty close to the averages over time.
Net Income
| Part 1 | Part 2 | Part 3 | |
|---|---|---|---|
| Bear | $9.8B | $14.6B | $12.4B |
| Bull | $11.9B | $22.1B | $15.4B |
Actuals: $12.6B
Finally the Net Income. Here I made a bit of a mistake. Because I did not expect Tesla to make (much) profits from their non-automotive businesses, I only looked at automotive revenues and applied the Operating Margin to that number; however, throughout 2022 both Tesla's Energy and Services divisions became profitable, so the actual numbers from automotive would be slightly lower. Either way, I believe the difference is small enough that we can ignore it for now, and my projections were pretty accurate.
Conclusion
Tesla had a very difficult year in 2022 with factory shutdowns in China, high commodity prices and a looming recession. As such, I would've expected them to be close to my bear case, which is exactly what happened. Although I overestimated unit sales and became a bit too optimistic after the massive Q1 beat, all the other numbers were fairly accurate.
Regardless, I will try to be slightly more conservative with my bear case numbers in the future to leave a larger margin for error, as you could argue that 2022 could've been even worse for Tesla under certain circumstances.
The Future
Looking at the future, although it is still difficult to predict without knowing the plans that Tesla is expected to reveal at the investor day in March, I will include 2025 in my projections.
Sales
To increase my margin of safety, I have reduced the 2023 bear case numbers significantly. When annualized, Tesla is currently producing roughly 650K cars from Fremont, 1M from Shanghai, and 250K from Berlin and from Texas. So even without further scaling from Berlin and Texas, which are both expected to double in production throughout the year, Tesla would do 2.15M cars this year.
That said, in an absolute worst case, I would see Fremont being shut down for retooling, Shanghai suffering from further COVID shutdowns and Berlin and Texas encountering severe issues with the ramp-up. In this extremely unlikely scenario, I could see them producing 400K, 800K, 250K and 250K units respectively, for a total of 1.7M units.
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | 1,700,000 | 2,400,000 |
| 2024 | 2,400,000 | 3,400,000 |
| 2025 | 3,000,000 | 4,800,000 |
ASP
Tesla dropped prices significantly in Q1. As such, I expect them to decrease ASPs from $54,385 to ~$51K in 2023. After 2023 I find them difficult to predict, so I will stick with $51K (essentially offsetting inflation).
Revenue
Based on the ASPs and delivery numbers, the revenues would be:
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | $87B | $122B |
| 2024 | $122B | $173B |
| 2025 | $153B | $245B |
Additionally, I expect the following revenue from non-automotive divisions:
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | $16B | $24B |
| 2024 | $22B | $40B |
| 2025 | $30B | $60B |
Operating Margin
Despite the price cuts, I expect IRA battery credits (starting in March), cheaper commodity prices, continuing manufacturing innovations, increasing economies of scale (especially in Berlin and Texas) and higher margins from Semis, Cybertrucks and Energy to largely offset the hit on margins (16% in Q4 and 16.8% in FY 2022).
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | 14% | 19% |
| 2024 | 15% | 22% |
| 2025 | 16% | 25% |
Net Income
Multiplying the total revenue by the operating margin gives us the following Net Income:
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | $14.4B | $28.8B |
| 2024 | $21.6B | $47.9B |
| 2025 | $29.3B | $76.3B |
P/E
Dividing the current $600B market cap by the projected net income gives us the following trailing P/E values should the stock stay flat around this market cap:
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | 42 | 21 |
| 2024 | 28 | 13 |
| 2025 | 20 | 8 |
PEG
This would translate into the following PEG ratings:
| Bear Case | Bull Case | |
|---|---|---|
| 2023 | 2.80 | 0.16 |
| 2024 | 0.56 | 0.20 |
| 2025 | 0.56 | 0.14 |
The conclusion
No matter which metric you look at, it's clear that at $108 Tesla was heavily oversold. At its current price, there is an argument to be made that Tesla is fairly valued or even slightly overvalued if you look max 1 year out, in the bear case scenario. This would require Tesla to miss their self-proclaimed sandbagged guidance and for margins to come down for the full year.
If you're willing to look out more than 1 year, or you believe the bull case (or something in between my bear and bull case, which is my personal expectation) to be right, Tesla is still clearly undervalued. It would need to grow between 79% and 1,300% through Q1 2026 to revert to the average PEG rating for high growth large caps.
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