What everyone is talking about Tesla‘s (TSLA 2.26%) three-to-one stock split, and given the stock’s sharp rise since early July, the electric car maker’s shares could grab the attention of many investors. Is now a good time to buy this growth stock? Or are the shares of the fast-growing company already priced in best-case scenarios?
While it’s true that Tesla stocks trade at an expensive price tag, it may be more deserved than some investors realize. Valuation does indeed look reasonable, alongside the attractive combination of a healthy company balance sheet, pent-up demand for its vehicles and rising revenues. Yes, measured by traditional valuation metrics like P/E and P/E, Tesla stocks look expensive on the face of it. But the stock is trading at such a high premium for a reason.
Let’s take a closer look at that.
It would be hard to overestimate how attractive Tesla’s fundamentals are. Think of the war chest of money. The company’s balance sheet contains $18.3 billion in cash and cash equivalents. The 12-month remaining free cash flow is also impressive, at nearly $7 billion. That’s an increase of about $5 billion in 2021 and just $2.7 billion in $2020.
The company’s turnover is also rising. 12-month revenue is $67 billion, up from about $54 billion in 2021 and nearly $32 billion in 2020. And management expects strong growth to continue. Indeed, management has repeatedly pointed out that unit production and deliveries should increase by an average of about 50% per year in the near future. And with delivery windows for new Tesla orders on the company’s website delayed until April of next year for some models, demand certainly remains robust — an indication that Tesla’s management isn’t bluffing about its sales growth expectations.
A huge addressable market
It’s also worth noting that while Tesla has already hit significant annual sales levels, it can be argued that the automaker is just getting started. Tesla management has always viewed the gas vehicle market as its addressable market — not the electric and hybrid vehicle niche. And given the way that essentially every major automaker is now leaning on heavy-investment electric vehicles, this view of Tesla’s addressable market looks more challenging than ever.
How big is the car market anyway? In 2022 – a year when new car sales were hampered by global supply chain challenges – global car sales are estimated to be around 80.8 million, according to estimates by JD Power. To show how much room Tesla has to grow, the company’s 2021 unit shipments were less than a million units.
In fact, Tesla CEO Elon Musk said at the company’s most recent annual shareholder meeting that when new automakers ramp up their advertising for their electric vehicles, it actually helps demand for Tesla’s vehicles. Electric vehicles are still so early in use that a lack of awareness may be the main factor holding back sales.
And then, of course, there’s the potential for Tesla’s fast-growing energy company. Musk has said he thinks his energy company could eventually compete with his car company.
Time to buy?
So is Tesla worth its price-to-earnings ratio of about 110 at the time of writing? While stocks at this level may not be a bargain, they can still be priced reasonably enough for investors to consider adding the stock to their portfolio as a small position relative to their overall portfolio value.
Daniel Sparks has no position in any of the listed stocks. His clients may own shares of the aforementioned companies. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.