Tesla Inc. (TSLA, Financial) is the leading electric vehicle manufacturer in the world, and its rise in the last three years has been a bigger-than-life movement considering how it became the most valuable automaker in the world even though it has yet to reach the manufacturing strength of other long-standing automakers such as General Motors Co. (GM, Financial) and Toyota Motor Corp. (TM, Financial).
The electric vehicle manufacturer, however, is on the correct path from a financial performance perspective, which is evident from the fact that 2020 was the first-ever profitable year for the company. For many years, Wall Street analysts questioned the ability of Tesla to become profitable, and the company achieved this on the back of strong revenue growth (from $204 million in 2011 to $31.5 billion in 2020).
ARK Invest, which has a reputation for identifying high-growth companies earlier than the rest of the investing public, recently published a research report assigning a target price of $3,000 per share for Tesla by 2025, suggesting the company is significantly undervalued at the closing market price of $611.29 on March 29.
ARK's investment thesis
This is not the first time ARK Invest has come up with a rich valuation for Tesla. In 2018, Ark Invest founder Catherine Wood (Trades, Portfolio) set a target price of $800 for Tesla's stock while it was trading at just $70, which seemed irrational at the time. However, the shares surged past $800 earlier this year, proving the fund manager was right on the mark.
ARK had previously forecast a 30% probability of Tesla delivering autonomous cars by 2024, and it now believes there is a 50% probability of this happening by 2025. According to the firm, the rollout of autonomous vehicles will be one of the most important steps in the growth story of Tesla.
In addition to this, ARK expects Tesla to achieve cost efficiencies in the next few years along with the expected increase in vehicle production. In its research report, ARK refers to Wright's Law on multiple instances, suggesting the production costs of future vehicles will decline significantly in the coming years, paving the way for Tesla to report high operating margins.
Tesla, to its merit, has been keeping up pace with its stated objectives as well. For instance, the company announced a plan to deliver 500,000 vehicles in 2020 before the economic recession came to light, and ended the year by delivering 499,550 vehicles worldwide. The company's ability to deliver on its seemingly impossible promises is one of the key factors ARK has taken into consideration in its valuation model.
Despite the economic upheaval caused by the Covid-19 virus-induced recession and the closure of the Tesla factory in California, the company manufactured 36% more cars in 2020 in comparison to 2019, which gives a glimpse of the strength of its global manufacturing plants. Strategically investing in China to manufacture vehicles locally proved to be a differentiator in 2020, and is likely to be a value driver in the long run as China is the world's largest market for electric vehicles.
The price of electric car batteries plays an important role in the profitability of Tesla. Over the past decade, the price of these components has dropped significantly, making it cheaper for Tesla to manufacture vehicles. According to Adele Peters at Fast Company, the price of batteries has fallen to $137 per kilowatt-hour from $1,110 in 2011, and these significant cost-savings can be passed on to consumers as well, making electric vehicles much more competitive in comparison to gasoline-powered vehicles. According to data from Statista, Tesla is the clear leader of the electric vehicle industry globally, and this market-leading position paints a promising picture of what the future holds for the company given that cost of production is expected to decline sharply.
Tesla is the largest clean energy company in the world and is on its way to becoming the most valuable automotive company as well. In addition to Tesla's battery-powered vehicles, the company also supplies solar power to residential and corporate customers under Tesla Energy. The company has a favorable outlook for the energy business considering the radical changes implemented by governments around the world to embrace clean energy solutions in a bid to promote the use of environmentally-friendly energy sources.
There are two major threats to Tesla's success, which need to be monitored carefully.
- The increasing competition in the automobile industry.
- The probability of unfavorable foreign currency fluctuations.
Tesla is enjoying first-mover advantages to the fast-growing electric vehicle industry, and these advantages, which include high brand awareness and consumer loyalty, might help it thwart the threat of competition for a long period of time. However, the relatively young nature of the industry presents other automakers with an opportunity to gain market share by introducing high-quality products, so Tesla will have to continue investing in the business to retain its market leadership.
Tesla remains focused on innovation
The founder and CEO of Tesla, Elon Musk, is expected to unveil at least a couple of new vehicles by the end of this year. The company plans to launch a new Model S Plaid Plus with a new cockpit before the end of 2021. Although Tesla hasn't given a production timeline, analysts are expecting to see the launch of Tesla's Cybertruck in the latter half of this year as well, which will be followed by an affordable single-motor version in 2022. The opening of a new Gigafactory in Texas is also on the cards, so 2021 could be one of the most important years for Tesla yet.
Ark Invest is increasingly gaining popularity among growth investors because of its recent success in identifying high-growth companies at a very early stage. The $3,000 target price might seem stretched, but keeping a close eye on Tesla to identify potential investment opportunities is the right decision because of its dominance in the electric vehicle industry. More often than not, industry leaders tend to trade at lofty valuation multiples, so if Tesla grows at double-digit rates as it has done over the past several years, its valuation will soon become more reasonable.
Disclosure: The author does not have any stocks mentioned in this article.
Read more here:
- Why Value Investors Should Focus on Japan
- Why Value Investing Can Come Back Strongly in 2021
- Why Lennar Is a Good Pick for Value Investors
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.