Tesla (TSLA) is a one-of-a-kind electric vehicle company that is listed on the NASDAQ exchange. Just now, it has been announced that the stock will be added to the S&P500. In this analysis, we’ll take a look at the fundamentals of the company, as well as what this news means for Tesla.
Some of the information in this post is based on the analysis I wrote in March.
S&P500 Requirements
- There are certain requirements a company must fulfill in order to be added to the S&P500.
- The company must be a U.S. Company
- Must have a market cap of at least $8.2 Billion
- Must be highly liquid
- Must have a public float of at least 50% of its shares outstanding
- Its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.
Tesla had a hard time fulfilling the last part of the requirement, as it was not profiting for a while. They demonstrated increasing revenue, but a lot of their profits were reinvested into building infrastructures/gigafactories, and R&D.
Fundamental Analysis
- Despite the Corona Virus (COVID-19), Tesla has managed to manufacture and deliver record-high number of vehicles for 2020
- Tesla ended 2019 with 6 Billion Dollars, and early this year, they raised an additional 2 Billion through stock offering
- This indicates that Tesla had enough money to go endure the chaos caused by the viral outbreak
- Tesla is one of the biggest beneficiaries of the Zero Emission Vehicle (ZEV) credit regulations, racking up huge ZEV credits that other automotive companies pay billions to purchase
- In March 2020, Tesla has taken up 25% of the Chinese EV market, and further domination in arguably one of the most important markets is anticipated.
- With Biden’s winning the election almost being certain, it’s anticipated that Tesla will heavily benefit from Biden’s green policies.
Arguments against Tesla
- Tesla has a negative Earnings Per Share ( EPS ). Negative earnings are a red flag for value investors
- Tesla's operating margin is arguably too low, and not enough to be profitable for the long term
- Tesla's Debt to Equity ratio is quite high, and is a reason for concern, as it suggests that Tesla is a higher risk investment
- While gross income growth of Tesla for the past three years have been great, these are not sustainable numbers
- There are arguments against Tesla's management; some argue that Elon Musk gave himself too big of a compensation package
- This is concerning to investors, as the company has still not turned an annual profit.
- Most of the arguments against Tesla are in regards to their rather questionable financials, which they have now proven to be solid by being added to the S&P500
Future Projections
- While the Electric Vehicle ( EV ) Market continues to grow, Tesla's market share remains at 17~18% of a rapidly growing industry
- Tesla's gigafactories have shown unprecedented progress in terms of how fast the factory was built, as well as the automated manufacturing process
- Tesla has billions miles of autonomous driving data, which is more data than any other player in the market for self-driving cars
- Based on the vast amount of data, Tesla's self driving cars will allow the company to generate software-company-like margins
- Tesla has better battery efficiency compared to combustion engine cars, and can still benefit from economies of scale
- According to EV experts, Tesla's vehicles are at least 4-5 years more advanced than those of its competitors.
Technical Analysis
- We can look at the daily chart for some insight regarding technical analysis
- Tesla is notorious for ignoring a lot of the technical signals that appear on the chart.
- As it’s more driven by news and fundamental developments, it’s best to merely reference the technical aspect.
- We can see a clear uptrend marked by the ichimoku cloud support
- Prices trading above the 100 Simple Moving Average (SMA) is a bullish sign
- We can see that we have never broken below the 200 SMA since Nov. 2019
- As we consolidate in a bullish pennant pattern, bullish news is likely to cause a breakout near the apex of the pattern.
Summary
In summary, Tesla is not for the average value investor, seeking to purchase stocks at an undervalued price. It is, however, for the investors who know how to value the company by future expectations. I believe that Tesla is an automotive company to the same degree as Amazon is a bookstore. There is a lot more potential in the fundamentals of this company that many fail to recognize, and despite the short term hardships it may face, the innovative values that Tesla prioritizes is what brought the company to the S&P500. This obviously isn’t the end for Tesla. From a conservative view, I can see the stock easily double in price from these levels. A lesson to take from this investment is that if you have an in-depth understanding of the asset or security you invest in, despite volatile price actions and bearish news, the patience of holding can greatly reward you.
If you like this analysis, please make sure to like the post, and follow for more quality content!
I would also appreciate it if you could leave a comment below with some original insight.
Some of the information in this post is based on the analysis I wrote in March.
S&P500 Requirements
- There are certain requirements a company must fulfill in order to be added to the S&P500.
- The company must be a U.S. Company
- Must have a market cap of at least $8.2 Billion
- Must be highly liquid
- Must have a public float of at least 50% of its shares outstanding
- Its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.
Tesla had a hard time fulfilling the last part of the requirement, as it was not profiting for a while. They demonstrated increasing revenue, but a lot of their profits were reinvested into building infrastructures/gigafactories, and R&D.
Fundamental Analysis
- Despite the Corona Virus (COVID-19), Tesla has managed to manufacture and deliver record-high number of vehicles for 2020
- Tesla ended 2019 with 6 Billion Dollars, and early this year, they raised an additional 2 Billion through stock offering
- This indicates that Tesla had enough money to go endure the chaos caused by the viral outbreak
- Tesla is one of the biggest beneficiaries of the Zero Emission Vehicle (ZEV) credit regulations, racking up huge ZEV credits that other automotive companies pay billions to purchase
- In March 2020, Tesla has taken up 25% of the Chinese EV market, and further domination in arguably one of the most important markets is anticipated.
- With Biden’s winning the election almost being certain, it’s anticipated that Tesla will heavily benefit from Biden’s green policies.
Arguments against Tesla
- Tesla has a negative Earnings Per Share ( EPS ). Negative earnings are a red flag for value investors
- Tesla's operating margin is arguably too low, and not enough to be profitable for the long term
- Tesla's Debt to Equity ratio is quite high, and is a reason for concern, as it suggests that Tesla is a higher risk investment
- While gross income growth of Tesla for the past three years have been great, these are not sustainable numbers
- There are arguments against Tesla's management; some argue that Elon Musk gave himself too big of a compensation package
- This is concerning to investors, as the company has still not turned an annual profit.
- Most of the arguments against Tesla are in regards to their rather questionable financials, which they have now proven to be solid by being added to the S&P500
Future Projections
- While the Electric Vehicle ( EV ) Market continues to grow, Tesla's market share remains at 17~18% of a rapidly growing industry
- Tesla's gigafactories have shown unprecedented progress in terms of how fast the factory was built, as well as the automated manufacturing process
- Tesla has billions miles of autonomous driving data, which is more data than any other player in the market for self-driving cars
- Based on the vast amount of data, Tesla's self driving cars will allow the company to generate software-company-like margins
- Tesla has better battery efficiency compared to combustion engine cars, and can still benefit from economies of scale
- According to EV experts, Tesla's vehicles are at least 4-5 years more advanced than those of its competitors.
Technical Analysis
- We can look at the daily chart for some insight regarding technical analysis
- Tesla is notorious for ignoring a lot of the technical signals that appear on the chart.
- As it’s more driven by news and fundamental developments, it’s best to merely reference the technical aspect.
- We can see a clear uptrend marked by the ichimoku cloud support
- Prices trading above the 100 Simple Moving Average (SMA) is a bullish sign
- We can see that we have never broken below the 200 SMA since Nov. 2019
- As we consolidate in a bullish pennant pattern, bullish news is likely to cause a breakout near the apex of the pattern.
Summary
In summary, Tesla is not for the average value investor, seeking to purchase stocks at an undervalued price. It is, however, for the investors who know how to value the company by future expectations. I believe that Tesla is an automotive company to the same degree as Amazon is a bookstore. There is a lot more potential in the fundamentals of this company that many fail to recognize, and despite the short term hardships it may face, the innovative values that Tesla prioritizes is what brought the company to the S&P500. This obviously isn’t the end for Tesla. From a conservative view, I can see the stock easily double in price from these levels. A lesson to take from this investment is that if you have an in-depth understanding of the asset or security you invest in, despite volatile price actions and bearish news, the patience of holding can greatly reward you.
If you like this analysis, please make sure to like the post, and follow for more quality content!
I would also appreciate it if you could leave a comment below with some original insight.
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