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Sylim888
2021-09-23

This seekingalpha guy apparently understands that Tesla has a very strong business fundamental and longterm growth potential, but unfortunately relies on someone else’s random, and rather simplistic valuation model to arrive at a conclusion… if you only invest in Tesla when they have proven they are winning in EV, autonomous driving, energy, robotics… sure this valuation model works for sure. But people are investing in Tesla exactly for this potential and Idon’t see how that can be factored in using just some simple numbers plugged into a generic model from somewhere /someone

Tesla: The Real Gamma Squeeze

Summary The announcement of a Tesla Bot (humanoid) has reignited momentum in Tesla's stock; however

Tesla: The Real Gamma Squeeze

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But people are investing in Tesla exactly for this potential and Idon’t see how that can be factored in using just some simple numbers plugged into a generic model from somewhere /someone&nbsp;</body></html>","htmlText":"<html><head></head><body>This seekingalpha&nbsp;guy apparently understands that Tesla has a very strong business fundamental and longterm growth potential, but unfortunately relies on someone else’s random, and rather simplistic&nbsp;valuation model to arrive at a conclusion… if you only invest in Tesla when they have proven they are winning in EV, autonomous driving, energy, robotics… sure this valuation model works for sure. But people are investing in Tesla exactly for this potential and Idon’t see how that can be factored in using just some simple numbers plugged into a generic model from somewhere /someone&nbsp;</body></html>","text":"This seekingalpha guy apparently understands that Tesla has a very strong business fundamental and longterm growth potential, but unfortunately relies on someone else’s random, and rather simplistic valuation model to arrive at a conclusion… if you only invest in Tesla when they have proven they are winning in EV, autonomous driving, energy, robotics… sure this valuation model works for sure. But people are investing in Tesla exactly for this potential and Idon’t see how that can be factored in using just some simple numbers plugged into a generic model from somewhere /someone","highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/863342799","repostId":1114645760,"repostType":2,"repost":{"id":"1114645760","kind":"news","pubTimestamp":1632293951,"share":"https://www.laohu8.com/m/news/1114645760?lang=&edition=full","pubTime":"2021-09-22 14:59","market":"us","language":"en","title":"Tesla: The Real Gamma Squeeze","url":"https://stock-news.laohu8.com/highlight/detail?id=1114645760","media":"seekingalpha","summary":"Summary\n\nThe announcement of a Tesla Bot (humanoid) has reignited momentum in Tesla's stock; however","content":"Summary\n<ul>\n <li>The announcement of a Tesla Bot (humanoid) has reignited momentum in Tesla's stock; however, this move may fizzle out soon.</li>\n <li>Tesla's fundamentals do not support its valuation, which remains out of touch with reality after nearly eight months of consolidation.</li>\n <li>I rate Tesla an \"Avoid\" at $760.</li>\n</ul>\nIntroduction\nTesla's (TSLA) AI Day event was meant to serve as a hiring event that can attract AI scientists/engineers who could help the EV-leader solve autonomous driving (and probably to develop a humanoid). Although Elon Musk has proven himself to be a visionary leader, he tends to overpromise and underdeliver, and so, we can safely assume that both fully autonomous driving and humanoid projects are at least a few years away from reaching the consumers (if they materialize at all). Now, I can't reliably estimate the success of Tesla's AI Day event in terms of its hiring efforts; however, the humanoid (Tesla Bot) announcement has undoubtedly generated some hype around the company and boosted its stock price.\n<img src=\"https://static.tigerbbs.com/6915884a7d44f015148ffd1753e2aa26\" tg-width=\"640\" tg-height=\"498\" referrerpolicy=\"no-referrer\">\nSource: YCharts\nIn the last month, Tesla's stock has moved up by ~$100, with the MACD indicator turning from negative to positive soon after Tesla's AI Day event. The hype around Tesla Bot has brought the stock back on the radar of retail investors who were initially excited by the idea, according to Google Trends data. However, the stock is getting close to being overbought (RSI at 65.4), and the MACD indicator has turned neutral from bullish. Hence, the humanoid hype rally may soon blow over, and Tesla could resume its consolidation.\n<img src=\"https://static.tigerbbs.com/30c5d8e75dc9fb21ae24fccddbf425cf\" tg-width=\"640\" tg-height=\"340\" referrerpolicy=\"no-referrer\">\nSource:Google Trends\nDuring the AI Day event, Carnegie Mellon University's Computer Engineering Professor, Raj Rajkumar, asked - \"Is Tesla Bot the next dream shot to pump up the hype machine?\" In reply, Musk said,\n<blockquote>\n I can safely say that it will be much longer than 10 years before a humanoid bot from any company on the planet can go to the store and get groceries for you.\n</blockquote>\nWhen Musk himself is not expecting the delivery of a commercial humanoid for a decade, I do not understand the logic behind some analysts upgrading Tesla's valuation on this bizarre project. Tesla is struggling to make autonomous driving work, as evidenced by repeat accidents associated with its Autopilot technology (the company's Autopilot system is being probed by NHTSA); I see no reason to cheer the announcement of a humanoid prototype that we may not see until 2025 (if Musk'sgeneral moonshot delivery timelines(delays) are repeated).\nAlthough Tesla's business fundamentals have been improving consistently over the years, multiple expansion is the primary driver of Tesla's price action. Tesla's Q2 report showed that the company's profitability is finally coming from core operations and is no longer dependent on EV credits or bitcoins. However, Tesla's fundamentals need more time to catch up to its valuation. As a technology enthusiast, I would love to see Tesla succeed, and I want to own more of such a revolutionary company, but my investing principles have kept me away from adding to my long position in this company over the last eighteen months due to valuation concerns.\nIn today's article, I will share my thinking around Tesla's recent price action (and, by extension, valuation), followed by an analysis of its fundamentals. We will further derive Tesla's fair value and expected returns to gauge if a fresh investment makes sense after the consolidation of the past six months. Lastly, I will discuss some of the investment risks associated with Tesla.\nTesla: The Real Gamma Squeeze\nEven before the meme stock craze became a thing in late 2020, Tesla's stock was trading in a similar vein to the likes of GameStop (GME), AMC Entertainment Holdings (AMC), and other such \"meme\" stocks. Tesla has been a retail favorite for years, and Tesla's fanboys have hit the jackpot with their investments in the company. In just a short space of twenty-four months, Tesla's stock has rallied by nearly +1500% (or 16x). Tesla's rise hasn't been as rapid as what we have witnessed with GameStop or AMC; however, it certainly resembles a typical squeeze, and the move up could have taken longer due to Tesla's scale.\n<img src=\"https://static.tigerbbs.com/43c3f5b7d2d5ef207a6bc634f33496a4\" tg-width=\"640\" tg-height=\"190\" referrerpolicy=\"no-referrer\">\nSource:YCharts\nSome Tesla bulls point to its 8-year underperformance before 2019 and claim that the stock just caught up to its intrinsic value, and to be fair, this is somewhat true. Tesla's business fundamentals have been improving consistently over the years; however, I believe that the primary driver of Tesla's stock is an absurd trading multiple expansion from ~2x P/S to ~20x P/S based on irrational market exuberance spurred on by a combination of factors such as short unwinding (Tesla's Short Interest has gone down from 218M shares [30% of float] to 27.5M shares [3% of float] after peaking in May 2019), gamma squeezes (retail investors [fanboys] buying OTM calls), addition to SP500 (forced index buying of more than $100B), etc.\n<img src=\"https://static.tigerbbs.com/d53dc1534dfe75e801efd94301f9e0fa\" tg-width=\"640\" tg-height=\"413\" referrerpolicy=\"no-referrer\">\nSource: YCharts\nTesla now commands the valuation of a high-margin SaaS business (which it clearly isn't). In all fairness, Tesla is a capital-intensive, low-margin automotive business, which has the potential to become a SaaS-like company someday. In recent times, several analysts have lauded Tesla's move to offer FSD as a monthly subscription service (at $99 a month for Enhance Autopilot customers and $199 a month for others); however, they fail to mention that Tesla's subscription offering comes at the cost of a $10,000 upfront payment. To be fair, I do expect the subscription service to be a success; however, it is unlikely to be a game-changer for Tesla (unless full autonomy is achieved).\n<img src=\"https://static.tigerbbs.com/4652a802090f10de357e7a2040e22532\" tg-width=\"640\" tg-height=\"401\" referrerpolicy=\"no-referrer\">\nSource: YCharts\nTesla has a massive growth runway in front of itself with clear product and technology lead expected to result in rapid growth over the next decade. However, the price investors are being asked to pay for Tesla (Price to FCF ratio of ~330x) is completely out of whack with reality. As you may know, rapidly growing, high-margin businesses tend to trade at premium valuations; however, I have never come across any situation quite like this one. I would like to reiterate, Tesla is not a high-margin SaaS company, and even if it can be one, the current multiple being asked for it is not in touch with reality. The high-growth universe has many better alternatives for capital allocation, and buying Tesla at this valuation makes little sense for investors seeking alpha.\nWhere Do The Fundamentals Stand Today?\nCurrently, Tesla's fundamentals do not support its valuation; however, that doesn't mean they never will. Tesla is a company that's growing each day, and the business momentum looks strong. In the last twelve months, Tesla recorded $2.6B of free cash flow on the back of robust revenues of ~$42B. While the gross margins have some improvement from 2019 lows, Tesla's operating margins keep getting better and better with every passing quarter.\n<img src=\"https://static.tigerbbs.com/620db097d576ef83940209ab3c2c7342\" tg-width=\"640\" tg-height=\"379\" referrerpolicy=\"no-referrer\">\nSource: YCharts\nIn Q2 2021, Tesla's revenue came in hot at ~$11.96B, up 98% y/y. Furthermore, we saw an even sharper jump in gross profits as GAAP gross margins improved from 21% to 24.1%. The ~300 basis point jump in gross margins resulted in a ~550 basis point improvement in operational margins.\n<img src=\"https://static.tigerbbs.com/2270c64e0f03ca1dfc8d142b4a5695a5\" tg-width=\"640\" tg-height=\"329\" referrerpolicy=\"no-referrer\">\nSource:Tesla Q2 2021 Earnings\nTesla has recorded positive net income for the last five quarters; however, Q2 was the first instance where profitability came from core operations and wasn't tied to EV credits or speculative investments like Bitcoin. Overall, Tesla is doing extremely well from a business perspective. Tesla's CFO, Zachary Kirkhorn, deserves plaudits for smart capital raises through equity sales. Today, Tesla's balance sheet is flush with cash (~$16B), which is in stark contrast to past times when Tesla used to operate precariously close to bankruptcy.\n<img src=\"https://static.tigerbbs.com/1a8a95ca4d4386ea26f74abf43e6e9da\" tg-width=\"640\" tg-height=\"280\" referrerpolicy=\"no-referrer\">\nSource:Tesla Q2 2021 Earnings\nThe long-term future for Tesla probably includes autonomous vehicles that generate income for their owners. Now, I do not know when or if Tesla will achieve full autonomy; however, I know that Tesla is the closest to solving it with a massive data advantage over competitors. In the meantime, Tesla's expansion in China, Texas, and Germany should enable the company to scale up production to sufficiently meet the robust demand for EVs. Tesla hopes to make ~900K vehicles this year, and Gigafactory Berlin and Gigafactory Austin will likely enter mass production within twelve months. Hence, Tesla has more capacity coming up online soon. Furthermore, Tesla's Model S and Model X production in California is ramping up once again after product refresh, and this could further boost Tesla's revenue and margin numbers.\n<img src=\"https://static.tigerbbs.com/1d149bdf1e6e2144cca3a1d7226ee27e\" tg-width=\"640\" tg-height=\"343\" referrerpolicy=\"no-referrer\">\nSource:Tesla Q2 2021 Earnings\nAs of today, Tesla is a well-capitalized and well-managed business that has the power to dominate the EV sector for years to come. Rapid multi-year growth looks like a certainty, and consensus analyst estimates suggest that Tesla could generate ~$400B revenues per year by 2031. If Tesla can continue to maintain its pace of innovation and hold onto its technological lead over rival automakers (traditional, startups, and upstarts), I think Tesla could even dwarf these numbers. Tesla's vehicles are akin to laptops on wheels, and once full autonomy is solved, Tesla could generate massive income (and free cash flow) from its installed base (which could run into tens of millions by the end of this decade) much like Apple (AAPL) or Roku (ROKU). Therefore, I am very excited by the future prospects of Tesla.\n<img src=\"https://static.tigerbbs.com/e48e7b1046f44701802f1bea6527eb2d\" tg-width=\"640\" tg-height=\"629\" referrerpolicy=\"no-referrer\">\nSource:Seeking Alpha Earnings Estimates\nWith that being said, investments cannot be based on love for fiction. As a quantamental investor, I like to take a rules-based approach for my investment operations. Let us determine Tesla's fair value and expected returns to gauge if it is a suitable investment at this time.\nTesla's Intrinsic Value And Expected Returns\nTo determine Tesla's intrinsic value, we will employ our proprietary valuation model. Here's what it entails:\n<ul>\n <li>In step 1, we use a traditional DCF model with free cash flow discounted by our (shareholders) cost of capital.</li>\n <li>In step 2, the model accounts for the effects of the change in shares outstanding (buybacks/dilutions).</li>\n <li>In step 3, we normalize valuation for future growth prospects at the end of the ten years. Then, we arrive at a CAGR using today's share price and the projected share price at the end of 10 years. If this beats the market by enough of a margin, we invest. If not, we wait for a better entry point.</li>\n</ul>\nAssumptions:\n<img src=\"https://static.tigerbbs.com/ce74aad82354f546e5dbac6948e3e725\" tg-width=\"609\" tg-height=\"536\" referrerpolicy=\"no-referrer\">Here are the results:\n<img src=\"https://static.tigerbbs.com/cec2373351c5bbc40367f09d391e10e6\" tg-width=\"609\" tg-height=\"733\" referrerpolicy=\"no-referrer\">Source: L.A. Stevens Valuation Model\nAs per my estimation, Tesla is worth ~$480 per share, i.e., it is currently overvalued by ~58%. Now, paying a premium for a revolutionary company like Tesla could be worth a punt; however, investors buying in at ~$760 are looking at market returns. Since Tesla is probably the easiest (and most known) way to play the EV revolution, investors have piled into the stock, diminishing hopes of long-term alpha generation.\n<img src=\"https://static.tigerbbs.com/eaca773ce57e2084b5b4901112da7f17\" tg-width=\"602\" tg-height=\"427\" referrerpolicy=\"no-referrer\">Source: L.A. Stevens Valuation Model\nOver the next ten years, Tesla's share price could grow from $760 to $2,070 at a CAGR rate of 10.53%. These expected returns are in line with long-term SPY returns; however, they fall short of our investment hurdle rate of 15%. Therefore, I rate Tesla an \"Avoid\" at $760.\nRisks\n<ul>\n <li>In the near term, supply chain shortages could lead to significant production and delivery delays that can hurt Tesla's business and stock price. As you may know, the Cybertruck is delayed, and this will likely affect 2022 projected sales negatively.</li>\n <li>Although Tesla has a clear technological lead in the EV industry, traditional automakers are poised to flood the market with new EVs in the next year or two. With increasing competition, Tesla could face a demand crunch for the first time in a long, long time. The risk of losing market share to traditional automakers is genuine, and some signs of such a dynamic have been witnessed in European countries such as Norway.</li>\n <li>Tesla has an installed base of 1M+ vehicles, which means the company has a ton of data powering its autonomous vehicle technology. However, \"real\" FSD (full autonomy) could still be some way off (years) from materializing, even though Elon would like you to believe otherwise.</li>\n <li>Tesla continues to execute its localization strategy; however, valuation leaves little room for error. As Tesla expands production capacity via expansion in Shanghai and new plants in Texas and Germany, any significant delays could hurt the stock.</li>\n <li>Elon Musk is a visionary leader; however, he brings massive idiosyncratic risk to Tesla. Elon has had run-ins with the SEC in the past, and he might continue to do so in the future. Elon's actions in relation to Bitcoin are nothing short of corporate governance failures for a company of Tesla's size and stature.</li>\n <li>The Big Short, Michael Burry, has shorted Tesla and talked about the potential of a reverse gamma squeeze. Thisvideoexplains how a reverse gamma squeeze would work. I do not think such a drastic downfall is possible for a $750B company, but then we have seen crazier things happen during broad market crashes. Therefore, I am not ruling out a reverse gamma squeeze just yet.</li>\n</ul>\nConcluding Thoughts\nAfter a stellar breakout move in 2020, Tesla's stock has been consolidating for the past six months. Although the buzz created by the humanoid announced at Tesla's AI Day event appears to have created some momentum in the stock; however, Tesla is overvalued by ~58%, and in my opinion, the consolidation must continue for another couple of years or so, for the company to become investable once again.\nThe EV revolution will materialize (sooner or later), and Tesla will probably continue to lead the charge as our planet moves towards sustainable energy. As you may know, Tesla has a long, long growth runway, and with a visionary like Elon Musk at the helm, this company could achieve absolutely anything. However, I wouldn't be looking to participate in any momentum trades in this counter due to its ridiculous valuation.\nFrom a long-term investor's perspective, Tesla is finally raking in real profits from its core automotive operations, and that's an important milestone in Tesla's growth story. However, the stock is priced for perfection (and more), and any significant execution setback can trigger a selloff in this counter. Due to unfavorable risk/reward, I am happy to watch Tesla from the sidelines, at least for the time being.\nKey Takeaway: I rate Tesla an \"Avoid\" at $760.","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Tesla: The Real Gamma Squeeze</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nTesla: The Real Gamma Squeeze\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-09-22 14:59 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4456217-tesla-the-real-gamma-squeeze>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nThe announcement of a Tesla Bot (humanoid) has reignited momentum in Tesla's stock; however, this move may fizzle out soon.\nTesla's fundamentals do not support its valuation, which remains ...\n\n<a href=\"https://seekingalpha.com/article/4456217-tesla-the-real-gamma-squeeze\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"TSLA":"特斯拉"},"source_url":"https://seekingalpha.com/article/4456217-tesla-the-real-gamma-squeeze","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114645760","content_text":"Summary\n\nThe announcement of a Tesla Bot (humanoid) has reignited momentum in Tesla's stock; however, this move may fizzle out soon.\nTesla's fundamentals do not support its valuation, which remains out of touch with reality after nearly eight months of consolidation.\nI rate Tesla an \"Avoid\" at $760.\n\nIntroduction\nTesla's (TSLA) AI Day event was meant to serve as a hiring event that can attract AI scientists/engineers who could help the EV-leader solve autonomous driving (and probably to develop a humanoid). Although Elon Musk has proven himself to be a visionary leader, he tends to overpromise and underdeliver, and so, we can safely assume that both fully autonomous driving and humanoid projects are at least a few years away from reaching the consumers (if they materialize at all). Now, I can't reliably estimate the success of Tesla's AI Day event in terms of its hiring efforts; however, the humanoid (Tesla Bot) announcement has undoubtedly generated some hype around the company and boosted its stock price.\n\nSource: YCharts\nIn the last month, Tesla's stock has moved up by ~$100, with the MACD indicator turning from negative to positive soon after Tesla's AI Day event. The hype around Tesla Bot has brought the stock back on the radar of retail investors who were initially excited by the idea, according to Google Trends data. However, the stock is getting close to being overbought (RSI at 65.4), and the MACD indicator has turned neutral from bullish. Hence, the humanoid hype rally may soon blow over, and Tesla could resume its consolidation.\n\nSource:Google Trends\nDuring the AI Day event, Carnegie Mellon University's Computer Engineering Professor, Raj Rajkumar, asked - \"Is Tesla Bot the next dream shot to pump up the hype machine?\" In reply, Musk said,\n\n I can safely say that it will be much longer than 10 years before a humanoid bot from any company on the planet can go to the store and get groceries for you.\n\nWhen Musk himself is not expecting the delivery of a commercial humanoid for a decade, I do not understand the logic behind some analysts upgrading Tesla's valuation on this bizarre project. Tesla is struggling to make autonomous driving work, as evidenced by repeat accidents associated with its Autopilot technology (the company's Autopilot system is being probed by NHTSA); I see no reason to cheer the announcement of a humanoid prototype that we may not see until 2025 (if Musk'sgeneral moonshot delivery timelines(delays) are repeated).\nAlthough Tesla's business fundamentals have been improving consistently over the years, multiple expansion is the primary driver of Tesla's price action. Tesla's Q2 report showed that the company's profitability is finally coming from core operations and is no longer dependent on EV credits or bitcoins. However, Tesla's fundamentals need more time to catch up to its valuation. As a technology enthusiast, I would love to see Tesla succeed, and I want to own more of such a revolutionary company, but my investing principles have kept me away from adding to my long position in this company over the last eighteen months due to valuation concerns.\nIn today's article, I will share my thinking around Tesla's recent price action (and, by extension, valuation), followed by an analysis of its fundamentals. We will further derive Tesla's fair value and expected returns to gauge if a fresh investment makes sense after the consolidation of the past six months. Lastly, I will discuss some of the investment risks associated with Tesla.\nTesla: The Real Gamma Squeeze\nEven before the meme stock craze became a thing in late 2020, Tesla's stock was trading in a similar vein to the likes of GameStop (GME), AMC Entertainment Holdings (AMC), and other such \"meme\" stocks. Tesla has been a retail favorite for years, and Tesla's fanboys have hit the jackpot with their investments in the company. In just a short space of twenty-four months, Tesla's stock has rallied by nearly +1500% (or 16x). Tesla's rise hasn't been as rapid as what we have witnessed with GameStop or AMC; however, it certainly resembles a typical squeeze, and the move up could have taken longer due to Tesla's scale.\n\nSource:YCharts\nSome Tesla bulls point to its 8-year underperformance before 2019 and claim that the stock just caught up to its intrinsic value, and to be fair, this is somewhat true. Tesla's business fundamentals have been improving consistently over the years; however, I believe that the primary driver of Tesla's stock is an absurd trading multiple expansion from ~2x P/S to ~20x P/S based on irrational market exuberance spurred on by a combination of factors such as short unwinding (Tesla's Short Interest has gone down from 218M shares [30% of float] to 27.5M shares [3% of float] after peaking in May 2019), gamma squeezes (retail investors [fanboys] buying OTM calls), addition to SP500 (forced index buying of more than $100B), etc.\n\nSource: YCharts\nTesla now commands the valuation of a high-margin SaaS business (which it clearly isn't). In all fairness, Tesla is a capital-intensive, low-margin automotive business, which has the potential to become a SaaS-like company someday. In recent times, several analysts have lauded Tesla's move to offer FSD as a monthly subscription service (at $99 a month for Enhance Autopilot customers and $199 a month for others); however, they fail to mention that Tesla's subscription offering comes at the cost of a $10,000 upfront payment. To be fair, I do expect the subscription service to be a success; however, it is unlikely to be a game-changer for Tesla (unless full autonomy is achieved).\n\nSource: YCharts\nTesla has a massive growth runway in front of itself with clear product and technology lead expected to result in rapid growth over the next decade. However, the price investors are being asked to pay for Tesla (Price to FCF ratio of ~330x) is completely out of whack with reality. As you may know, rapidly growing, high-margin businesses tend to trade at premium valuations; however, I have never come across any situation quite like this one. I would like to reiterate, Tesla is not a high-margin SaaS company, and even if it can be one, the current multiple being asked for it is not in touch with reality. The high-growth universe has many better alternatives for capital allocation, and buying Tesla at this valuation makes little sense for investors seeking alpha.\nWhere Do The Fundamentals Stand Today?\nCurrently, Tesla's fundamentals do not support its valuation; however, that doesn't mean they never will. Tesla is a company that's growing each day, and the business momentum looks strong. In the last twelve months, Tesla recorded $2.6B of free cash flow on the back of robust revenues of ~$42B. While the gross margins have some improvement from 2019 lows, Tesla's operating margins keep getting better and better with every passing quarter.\n\nSource: YCharts\nIn Q2 2021, Tesla's revenue came in hot at ~$11.96B, up 98% y/y. Furthermore, we saw an even sharper jump in gross profits as GAAP gross margins improved from 21% to 24.1%. The ~300 basis point jump in gross margins resulted in a ~550 basis point improvement in operational margins.\n\nSource:Tesla Q2 2021 Earnings\nTesla has recorded positive net income for the last five quarters; however, Q2 was the first instance where profitability came from core operations and wasn't tied to EV credits or speculative investments like Bitcoin. Overall, Tesla is doing extremely well from a business perspective. Tesla's CFO, Zachary Kirkhorn, deserves plaudits for smart capital raises through equity sales. Today, Tesla's balance sheet is flush with cash (~$16B), which is in stark contrast to past times when Tesla used to operate precariously close to bankruptcy.\n\nSource:Tesla Q2 2021 Earnings\nThe long-term future for Tesla probably includes autonomous vehicles that generate income for their owners. Now, I do not know when or if Tesla will achieve full autonomy; however, I know that Tesla is the closest to solving it with a massive data advantage over competitors. In the meantime, Tesla's expansion in China, Texas, and Germany should enable the company to scale up production to sufficiently meet the robust demand for EVs. Tesla hopes to make ~900K vehicles this year, and Gigafactory Berlin and Gigafactory Austin will likely enter mass production within twelve months. Hence, Tesla has more capacity coming up online soon. Furthermore, Tesla's Model S and Model X production in California is ramping up once again after product refresh, and this could further boost Tesla's revenue and margin numbers.\n\nSource:Tesla Q2 2021 Earnings\nAs of today, Tesla is a well-capitalized and well-managed business that has the power to dominate the EV sector for years to come. Rapid multi-year growth looks like a certainty, and consensus analyst estimates suggest that Tesla could generate ~$400B revenues per year by 2031. If Tesla can continue to maintain its pace of innovation and hold onto its technological lead over rival automakers (traditional, startups, and upstarts), I think Tesla could even dwarf these numbers. Tesla's vehicles are akin to laptops on wheels, and once full autonomy is solved, Tesla could generate massive income (and free cash flow) from its installed base (which could run into tens of millions by the end of this decade) much like Apple (AAPL) or Roku (ROKU). Therefore, I am very excited by the future prospects of Tesla.\n\nSource:Seeking Alpha Earnings Estimates\nWith that being said, investments cannot be based on love for fiction. As a quantamental investor, I like to take a rules-based approach for my investment operations. Let us determine Tesla's fair value and expected returns to gauge if it is a suitable investment at this time.\nTesla's Intrinsic Value And Expected Returns\nTo determine Tesla's intrinsic value, we will employ our proprietary valuation model. Here's what it entails:\n\nIn step 1, we use a traditional DCF model with free cash flow discounted by our (shareholders) cost of capital.\nIn step 2, the model accounts for the effects of the change in shares outstanding (buybacks/dilutions).\nIn step 3, we normalize valuation for future growth prospects at the end of the ten years. Then, we arrive at a CAGR using today's share price and the projected share price at the end of 10 years. If this beats the market by enough of a margin, we invest. If not, we wait for a better entry point.\n\nAssumptions:\nHere are the results:\nSource: L.A. Stevens Valuation Model\nAs per my estimation, Tesla is worth ~$480 per share, i.e., it is currently overvalued by ~58%. Now, paying a premium for a revolutionary company like Tesla could be worth a punt; however, investors buying in at ~$760 are looking at market returns. Since Tesla is probably the easiest (and most known) way to play the EV revolution, investors have piled into the stock, diminishing hopes of long-term alpha generation.\nSource: L.A. Stevens Valuation Model\nOver the next ten years, Tesla's share price could grow from $760 to $2,070 at a CAGR rate of 10.53%. These expected returns are in line with long-term SPY returns; however, they fall short of our investment hurdle rate of 15%. Therefore, I rate Tesla an \"Avoid\" at $760.\nRisks\n\nIn the near term, supply chain shortages could lead to significant production and delivery delays that can hurt Tesla's business and stock price. As you may know, the Cybertruck is delayed, and this will likely affect 2022 projected sales negatively.\nAlthough Tesla has a clear technological lead in the EV industry, traditional automakers are poised to flood the market with new EVs in the next year or two. With increasing competition, Tesla could face a demand crunch for the first time in a long, long time. The risk of losing market share to traditional automakers is genuine, and some signs of such a dynamic have been witnessed in European countries such as Norway.\nTesla has an installed base of 1M+ vehicles, which means the company has a ton of data powering its autonomous vehicle technology. However, \"real\" FSD (full autonomy) could still be some way off (years) from materializing, even though Elon would like you to believe otherwise.\nTesla continues to execute its localization strategy; however, valuation leaves little room for error. As Tesla expands production capacity via expansion in Shanghai and new plants in Texas and Germany, any significant delays could hurt the stock.\nElon Musk is a visionary leader; however, he brings massive idiosyncratic risk to Tesla. Elon has had run-ins with the SEC in the past, and he might continue to do so in the future. Elon's actions in relation to Bitcoin are nothing short of corporate governance failures for a company of Tesla's size and stature.\nThe Big Short, Michael Burry, has shorted Tesla and talked about the potential of a reverse gamma squeeze. Thisvideoexplains how a reverse gamma squeeze would work. I do not think such a drastic downfall is possible for a $750B company, but then we have seen crazier things happen during broad market crashes. Therefore, I am not ruling out a reverse gamma squeeze just yet.\n\nConcluding Thoughts\nAfter a stellar breakout move in 2020, Tesla's stock has been consolidating for the past six months. Although the buzz created by the humanoid announced at Tesla's AI Day event appears to have created some momentum in the stock; however, Tesla is overvalued by ~58%, and in my opinion, the consolidation must continue for another couple of years or so, for the company to become investable once again.\nThe EV revolution will materialize (sooner or later), and Tesla will probably continue to lead the charge as our planet moves towards sustainable energy. As you may know, Tesla has a long, long growth runway, and with a visionary like Elon Musk at the helm, this company could achieve absolutely anything. However, I wouldn't be looking to participate in any momentum trades in this counter due to its ridiculous valuation.\nFrom a long-term investor's perspective, Tesla is finally raking in real profits from its core automotive operations, and that's an important milestone in Tesla's growth story. However, the stock is priced for perfection (and more), and any significant execution setback can trigger a selloff in this counter. Due to unfavorable risk/reward, I am happy to watch Tesla from the sidelines, at least for the time being.\nKey Takeaway: I rate Tesla an \"Avoid\" at $760.","news_type":1},"isVote":1,"tweetType":1,"viewCount":250,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":["TSLA"],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":492,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}