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What Analysts Get Wrong When Valuing Tesla

Longtime readers know that I’m a big fan of Tesla (Nasdaq: TSLA). My wife drives a 2016 Model X, and we own shares in the company. Since we bought in, the stock has risen from $8 per share (split-adjusted) to about $600.

However, the year-to-date performance of Tesla shares has been underwhelming. As of last Friday, they were down more than 13.5%.

Nonetheless, I was curious when Toni Sacconaghi – a senior research analyst at Bernstein – set an “Underperform” rating and a $180 price target for Tesla last Friday on CNBC.

Curious to hear his rationale, I watched the remainder of the segment.

But, in my opinion, his argument had a gaping flaw.

Dwindling Electric Vehicle Market Share

Sacconaghi commented on the company the same day it released the Model S Plaid. This EV model has a newly designed battery pack, updated motors and a record-low drag coefficient.

Sacconaghi did acknowledge that Tesla is still the technology leader in the EV space, but he took issue with Tesla’s valuation.

He claimed that Tesla has a 20% market share in the EV space. And he correctly asserted that with plenty of competition coming along, Tesla won’t be able to maintain that big of a share.

I don’t disagree with that. If Tesla were just a car company, its current valuation of $587 billion would be excessive.

It’s what Sacconaghi didn’t talk about that struck me.

One Brand, Three Businesses

In his entire interview, all Sacconaghi talked about was Tesla’s automobile business. He never mentioned Tesla’s other businesses.

And I think that’s a huge oversight. You can’t value the company without looking at its energy storage and solar energy business units.

Co-founder and CEO Elon Musk has claimed on numerous occasions that Tesla is a sustainable energy company. And one of its sectors just happens to make superb EVs.

Another sector of the company makes a solar roof product that is completely unlike traditional roof-mounted solar panels. With Tesla’s Solar Roof, the shingles themselves directly absorb the sun’s energy.

The company started taking orders for its solar tiles in 2017. But its first few versions were costly, and the shingles were difficult to install. So Tesla redesigned them and slashed the price.

Today, the installation of its Solar Roof V3 is much simpler and uses fewer parts. And installing a Tesla roof is not much more costly than installing conventional solar panels on a new roof.

As a result, Tesla’s solar shipments have been on a tear. In the first quarter of 2021, they jumped 163% year over year.

And Tesla is more than able to meet the demand. It’s increasing production at its Buffalo, New York, Gigafactory.

Additionally, back in 2019, Musk said he believed the company’s energy storage business could grow to “roughly the same size” as its car business. During the fourth quarter of 2020, Tesla deployed 1,584 megawatt-hours of storage.

That was a quarter-over-quarter increase of 108%. And it was a year-over-year increase of 509%.

The first quarter of this year saw 445 megawatt-hours deployed. While that was down from fourth quarter 2020 numbers, it was up 71% year over year.

Tesla’s deployed storage has historically started low in its first quarter and increased through its fourth.

But it is important to note that Tesla’s energy storage business is growing faster than its EV business.

I think that certainly warrants giving Tesla a much higher valuation than Sacconaghi’s $180 per share…

And I’m not the only one who thinks that Tesla is still undervalued.

Billionaire investor Ron Baron believes Tesla could easily become a $2 trillion company. That’s nearly four times its current valuation.

And so far, Baron’s big bet on Tesla is paying off in spades. His investment firm, Baron Capital, has purchased more than 7.3 million shares of Tesla.

He expects Tesla to return 20 times his initial investment. And he’s not selling any of his shares.

How to Value Tesla

Tesla is a sustainable energy company. It has not one but three growth engines driving it. And that’s what analysts often miss.

Make sure that you take them all into account when considering Tesla’s share valuation.

Investors who do could find themselves richly rewarded.

Good investing,


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