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Education Series: Single-Stock ETPs

Is Tesla Overpriced?

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

As a company, Tesla has done wonders: it has successfully proven that Electrified Vehicles (EVs) can be successfully designed and consumer sentiment will be positive. Over the past ten years, while new vehicle sales in the U.S. have shown long-term decline, the sale of EVs – Battery Electric Vehicles (BEVs), Plug-in Hybrid Vehicles (PHEVs), Hybrid Vehicles and Fuel-Cell Vehicles (FCEVs) – have shown year-on-year increases. This has compelled nearly major carmaker in the world – from Germany and Japan to India and Brazil – to reorient focus towards this new frontier of vehicle technology.

However, while the company is doing rather well as a business, the stock’s performance flies in the face of all rational outlook regarding the auto industry.

Volumes and Ratios

Lets consider two other major U.S. carmakers as comparators: Ford (NYSE: F) and General Motors (NYSE: GM). For the calendar year of 2021, Ford is estimated to have sold 1.905 million cars in the U.S., of which about 121,000 were EVs. General Motors sold 3.655 million cars in the same period, of which only a little under 25,000 cars are EVs. The company is betting quite heavily on vehicles based on its all-new Ultium platform such as the GMC Hummer EV Pickup/GMC Hummer EV SUV, the Cadillac Lyriq, and the Chevrolet Silverado EV/GMC Sierra EV as well as the BrightDrop commercial vehicles – all of which are expected to be introduced by the end of 2022/early 2023. Tesla is estimated to have sold (as opposed to delivered) around 353,000 EVs (all of which are, of course, BEVs).

An additional comparator could be Toyota which is estimated to have sold 2.332 million cars in the U.S., of which a little under 584,000 were EVs but is less suitable in all comparison cases on account of its sizeable historical presence in a variety of markets. Toyota announced a lineup of 12 cars under the “Beyond Zero” (BZ) badge in December 2021, a number of which could be suitable for North American markets.

Tesla’s CEO Elon Musk has traditionally shown significant disdain for those shorting his company’s stock in recent years particularly in social media, where both he and his company have many fans. However, in reality, it can be seen that net short interest in his company has reduced to drawing up nearly par with US rivals Ford and General Motors in the present, despite stock prices climbing upwards.

In terms of daily traded volumes, Tesla has been slipping downwards to being nearly par of that with Ford and General Motors as well:

Note: Toyota being added as a comparator indicates the relative “normalcy” of these levels across the board.

Given that this is a performance graph in percentages, it should be noted that the 100% mark for Tesla is pegged at 12.499 million shares, which translates to 1.76% of shares outstanding. The 100% mark for Ford and GM is 0.74% and 0.79% of shares outstanding.

In terms of PE Ratios, Tesla’s ratios have historically been massively higher than those of Ford and General Motors.

Note: The starred entries were originally blank in the data provider’s (Koyfin) dashboard. The data provider stated that they don’t consider ratios over 500 and earnings below $0.01 to be meaningful and hence don’t publish them.

In terms of Price-to-Sales Ratio (PS Ratios), Tesla exhibits similar behaviour as with PE Ratios relative to Ford and General Motors:

Just by these two ratios, it is plain to see the problem with the stock: they have been far too high in recent years. While the company is doing rather well as a business, its success is completely divorced from its stock’s performance.

Since the start of 2022, top-line stocks in what is already the world’s most overvalued equity market have been exhibiting a substantial “ratio decay”. Tesla’s stock shows no exception to this rule. With just three facts, a simple simulation can be constructed to estimate a likely scenario for stock trajectory in 2022.

The Model: Assumptions and Results

  1. It’s estimated that the PE Ratio is strongly correlated to the stock’s volatility in the past. Thus, the first assumption made is that the PE Ratio will draw down to 20 while the Earnings Per Share (EPS) will go up to 3.2 by December 2022. Even with these drawn-down numbers, the company’s ratios are estimated to remain ahead of the those projected for both Ford and General Motors. This first set of paths are denoted as the “Earnings-Driven” (ED) path.
  2. It’s estimated that the PS Ratio has the highest correlation with the stock price trajectory over the past few months. Thus, the second assumption made is that the PS Ratio will draw down to 5 while net sales will go up by 15% by December 2022. Even with these numbers, the company’s figures are estimated to remain ahead of those projected for both Ford and General Motors. This second set of paths is denoted as the “Sales-Driven” (SD) path.
  3. Current trends in stock trajectory since November 2021 indicate a gentle oscillation that is pulling the stock steadily downwards. This trend is carried forward till December 2022 to form the third set of paths denoted as the “Trend” path

These three paths are averaged into a “Path Average” (PA) via a random weighing matrix applied daily such that none of them have more than 60% weight on any day. Furthermore, no path holds the same majority weight on consecutive days. The results of the simulation are as follows:

By the start of December, the simulation estimates that Tesla’s stock price will be in the $284 – $367 range, with the PA price being $347.56.

In Conclusion

The simulation exemplifies that even a a strong earnings outlook and industry-leading ratios implies a price for the stock that is well below current price levels. While speculative interest in a company with a niche technology offering might be normal, it should be clear to most investors that the EV space is no longer “niche”; it’s instead the norm. The company’s market share, while dominant, is already beginning to slip downwards as the Electrified Vehicle segment shows an increasing number of choices for customers.

While the stock can be considered overvalued, the company’s fundamentals are undoubtedly solid. While earnings releases can be expected to generate a “bump” in stock prices, it likely wouldn’t be a long-lasting upward trajectory nor is i feasible to justify the price level the stock currently has.

This opens a possibility for short-term tactical plays either with the stock or with instruments with the stock underlying them for disciplined and empowered investors looking to make inflation-beating gains. For long-time stockholders who have held the company for more than (say) 5 years, the rationalization of the stock price will also lend long-term robustness in stock performance going forward.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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