Is Tesla a better opportunity than Indian automakers?

Tesla Inc. shares have gained 59% since its 23 October earnings date. While the initial boost came from the third-quarter performance, the positive implications of Donald Trump’s election further pushed up the stock price.

The rally’s momentum helped the stock break above a broad $195-$270 range it traded in since late June. The twin catalysts propelled the company’s market capitalization past the $1 trillion mark on 8 November.

Not all are on board the bullish Tesla bandwagon. The consensus analysts’ price target for Tesla shares, compiled by TipRanks, is at $232.64, suggesting roughly 32% downside from current levels.

aluation stretched?

Tesla’s shares are trading at a forward price-earnings (P/E) multiple of 102.04 and the trailing 12-month P/E is only a slightly lower 93.71, according to Yahoo Finance data, This is sharply higher than the S&P 500 auto manufacturers’ forward P/E ratio of 38.2.

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A premium valuation over the rest of the automakers, which primarily derive revenue and earnings from internal combustion vehicles, may be justified. Tesla bulls argue that it is much more than an auto company, and it deserves to be valued at the multiples of growth-oriented tech stocks.

This argument is premised on the promise the Elon Musk-led company’s full self-driving (FSD) technology holds once it attains unsupervised fully autonomous status. Tesla currently markets the technology as FSD (Supervised). The company sells the package for a one-time purchase cost of $8,000 or a monthly subscription price of $99.

The company’s FSD will not be easy to implement, given the technological risks and regulatory hurdles involved.

Trump’s reelection may have removed some of the regulatory hurdles. A recent Bloomberg report said the US President-elect's transition team is considering prioritizing the formation of a federal framework for self-driving vehicles, which buoyed the stock.

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Speaking on Tesla’s third-quarter earnings call, Musk said full autonomy would become a reality with the company’s existing product lineup in 2025.

More importantly, FSD would be the key technology that would power Tesla’s yet-to-be-launched “robotaxi” service. The world’s richest man said the Cybercab, a two-seater vehicle without the steering wheel and pedals meant for the robotaxi fleet, will go into volume production in 2026.

There are other moving parts that add up to Tesla’s valuation. The company is engaged in the manufacturing of humanoid robots, which it calls Optimus. Musk expressed confidence that Optimus will ultimately be the most valuable part of Tesla. It also has a thriving energy storage business. In the third quarter that ended 30 September, energy storage gross margin rose to a record 30.5%.

Tesla vs. Indian automakers

Although a Tesla versus major Indian carmakers may not be an apples-to-apples comparison, here’s a look at how it stacks up:

* Numbers for Tesla pertains to FY23, i.e., 12 months ended December 2023, those for Indian manufacturers relates to FY24, i.e., 12 months ended March 2024

**Includes 395,845 in passenger vehicles

***Includes trucks, passenger vehicles, and three-wheelers, with passenger vehicle sales alone accounting for 459,877

****GuruFocus data

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As the table shows, the valuations of the Indian companies are far more attractive than Tesla's. But Tesla is all about potentially huge future opportunities. If these opportunities turn into reality, then even these lofty valuations could seem attractive in hindsight.

Not wanting to be left behind, the Indian companies are tapping into the big opportunity that exists today, and are starting to tap into the future EV opportunity in a bigger way. Having said that, there are unlikely to be any moonshots here. So, there’s potential for solid returns, but with some risk. Tesla, on the other hand, presents a massive return vs a massive risk opportunity.

Let’s dig deeper into where Tesla is headed and what could be driving its valuations.

EV inflection on the cards?

Tesla’s core EV business, which weathered the 2020-21 covid-19 pandemic fairly well, thanks to the strong uptake of its Model Y all-electric SUV, has come under pressure since the abatement of the catastrophic event. The inflationary pressure stoked by the copious stimulus measures from governments and central banks the world over following the pandemic served as a speed bump for economies.

Amid the uncertain economic backdrop, demand, especially for relatively expensive consumer discretionary items such as EVs, tapered off.

For 2024, the management has guided to 20%-30% volume growth.

Tesla had to resort to aggressive price cuts to reinvigorate sales, which weighed down on the gross margin. Auto gross margin, excluding regulatory credits, has halved from a peak of 30% in the first quarter of 2022 to 14.60% in the second quarter of 2024, before inflecting higher to 17.10% in the third quarter.

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With the incoming administration under Trump proposing to remove federal tax credits for EV purchases, Tesla could get a hit. But it could emerge a winner eventually as the elimination of the sop will likely disproportionately hurt smaller EV players, which in turn will improve Tesla’s competitive positioning.

Weighing in on the dynamics, Wedbush analyst Dan Ives said Tesla has a “clear competitive advantage” in a non-EV subsidy environment starting in 2025. China tariffs proposed by Trump will likely keep Chinese EV players such as BYD and Nio from flooding the US market, which is a double positive for the company, he added.

Gary Black, a fund manager whose firm has a position in Tesla, believes the launch of a cheaper (sub-$30K EV) could bring volumes back and lift the core business.

Tesla’s sum-of-parts valuation

Ives, who has a $400 price (over 18% upside potential vis-a-vis current price), sees Tesla’s AI and autonomous opportunity alone as worth $1 trillion. With the Trump-Musk bonhomie at its peak, a Tesla-friendly regime would mean these key initiatives would now get fast-tracked, he said.

AI and autonomy include Tesla’s FSD, Dojo supercomputer used in training FSD, Optimus bot and automation of manufacturing processes.

Morgan Stanley’s Adam Jonas, another Tesla bull, who has an “overweight” rating and $310 one-year price target for the stock, sees the stock hitting $500 in a bull-case scenario, based on his 2030 estimates for the various segments.

*Auto: $90/share

*Energy: $85/share

*Network services (recurring software and services revenue): $146/share

*Mobility/ride-sharing: $118/share

*Third-party battery/powertrain: $61/share

The analyst does not include Optimus in his model.

On the other hand, there are sceptics as well. GLJ Research’s Gordon Johnson said it is only right to value Tesla as an automotive company, given the scepticism regarding the rest of its revenue opportunities coming to fruition any time soon.

Tesla vs Indian automakers: Which stock to opt for

Tesla, with its star appeal and history of above-average returns, could appear a better investment option at the outset. As has been the case with most growth stocks, the high returns come along with high risks.

On the flip side, the Indian automakers present a more here-and-now play, with no embedded moonshot bets (at least none are known openly) but a solid hold over the current auto markets—and at far more reasonable valuations.

For more such analysis, read Profit Pulse.

Which direction you take will depend on a whole host of factors, including the “price” you are willing to pay for a “future” opportunity.

Note: We have relied on data from widely used and accepted sources of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only. 

Shanthi has over two decades of reporting on US markets and stocks, with particular focus on techs, EVs and biopharma companies. Her stories have appeared on Yahoo Finance, MSN and have been cited in books and US newspapers as well.

Disclosure: The writer and her dependents do not hold the stocks/ETFs discussed in this article.