Over the last two days, we talked about Antifade companies, the ones whose economic rent (the ratio of free cash flow to economic assets) increases over time rather than decreases.
Another one of those Antifade companies is Tesla. Tesla is THE “speculative” stock, with a valuation that “does not make sense”. Based on 2020 data, the company trades on 630x normalized operating free cash flow, 16.2x net economic assets and has an operating rent of 2.6%, 10x less than Microsoft, for an enterprise value that is not far from 30% of the software company. However, when taking into account the simple drivers of the Battery Electric Vehicles replacing Internal Combustion Engine vehicles, the current valuation makes a lot more sense.
It is plausible that Electric vehicles will have at least an 8% share of the market in 2025. With a market share of 21%, Tesla may sell 1.5m to 2m vehicles, up at least threefold from the 500,000 units sold in 2020. Assuming the average selling price continues to fall, Tesla will still turn over $80B by then.
A leveraging of its asset base (especially its R&D effort) and a modest margin enhancement would propel its rent to high double digits, whilst growing at perhaps twice the auto market. On that basis, Tesla could be trading on a market multiple in 5 years’ time without taking Tesla’s other businesses into account.
Click here for detailed Amazon, Tesla & Nvidia analysis and the Antifade model overview.