Tesla stock hopes and dreams
In Elon we trust!
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TLDR: The vast majority of Tesla’s stock price is based not on what Tesla is doing today but on what investors hope it will do in the future. Specifically, more than ~75% of Tesla’s value depends on businesses the company hasn’t even launched yet — like robotaxis, “mobile services,” and humanoid robots. So, you could call Tesla “the world’s most valuable pre-launch startup — with a struggling car company attached.” I own Tesla through index funds, and I would not personally buy more at today’s price. But that’s me. And it’s not investment advice.
In Elon we trust
The price of a stock reflects not what is happening today but what investors collectively think (or at least hope) will happen in the future.
This is true for all stocks.
But it’s especially true for Tesla’s stock.
The vast majority of the company’s current stock price — let alone its hypothetical future stock prices — depends on products the company hasn’t launched yet.
Of course, for Tesla, this is nothing new. Tesla’s stock has always been priced more on future hopes than current reality.
There are two reasons for this. Both depend on the company’s CEO, Elon Musk:
Elon Musk is one of the best storytellers in the history of business. Steve Jobs was famous for his ability to create a “reality distortion field.” Elon’s even better at it. The pictures Elon paints of the future are so bold and inspiring that it’s hard not to become entranced by them. Great leaders inspire people to work together to build a better future. Elon can be a preternaturally great leader.
Elon Musk backs up his storytelling with execution. Not always — and certainly not always on schedule — but often, and remarkably. Regardless of what you think of Elon’s recent writings on X (formerly Twitter) and conduct as the leader of the quasi-governmental agency DOGE, he’s one of the best business “executors” in history.
Many people are angry at Elon about some of what he has said and done in the past few years. But don’t let that warp your assessment of his ability to do things that most people think are impossible.
After all, Elon (and his teams) built the first new major U.S. car company in more than half a century — one that kicked off an EV revolution and now makes the single-best-selling car on the planet. He built a private rocket company, which now dominates the space business. He built a solar-panel and battery company. He built the dominant satellite Internet company. He bought, gutted, and began to rebuild a major social network. And, somehow, in his spare time, he has launched an AI company (xAI) that is competing with the titans of the AI industry.
Any one of these accomplishments would be a Hall of Fame performance for any other entrepreneur. Elon has somehow managed to do all of them.
And now, finally, to the great relief of Tesla investors, Elon is scaling back his time at DOGE and spending (a bit) more at Tesla.
That’s a great relief. Because Tesla’s in a really tough spot.
Elon and Tesla have towering mountains to climb
Tesla’s pioneering car business has stopped growing and is now collapsing. Tesla has lost its lead in EVs and is now losing market share. Chinese competitors have vaulted past it and are now selling (arguably) better cars at much lower prices. Tesla’s brand has been damaged. Tesla’s self-driving technology, which is critical to its future, has fallen behind Waymo, et al: Five years after painting a vision of fleets of millions of fully autonomous cars on the road, Tesla still has yet to launch even one. (Meanwhile, Waymo’s doing 250,000 fully autonomous rides a day.) Tesla is also already way behind Chinese and even American companies in the “humanoid robot” business.
Most important, the positive cash flows from Tesla’s car business, which allow Tesla to invest in future products like robotaxis (CyberCab) and humanoids (Optimus), have tanked. This means, simply, that Tesla has much less money to invest in building the future.
So, Tesla, and Tesla investors need Elon desperately.
They need him to provide the leadership and execution necessary for Tesla to work its way out of this pickle and then resume doing what it has frequently done — the impossible. Specifically, they need Elon to keep painting that hypnotizing vision of the future and then inspire Tesla’s team to make it happen.
In the week since Tesla reported a disastrous first quarter — and Elon announced that he’ll be spending more time at the company — Elon has begun doing that. And the stock is already up more than 20% on the news.
So many Tesla questions!
Regenerator (this publication) is about building a better future. Elon is one of the world’s most talented and impactful entrepreneurs. And Tesla is still — even in its current crippled and deeply challenged state — one of the world’s most important companies.
There are many important aspects of Tesla to consider. In the coming days and weeks, we’ll consider them. But, today, because you — like me — already have way too much to read, let’s just look at one aspect of Tesla.
Specifically, let’s look at just how much of Tesla’s stock price depends on businesses the company hasn’t even launched yet.
Tesla bull case: $800+. Tesla bear case: $0
The most influential Tesla analyst is Adam Jonas, at Morgan Stanley. Adam has covered Tesla for 15 years. He’s bullish. He has a price target of $410. He has also laid out a “bull” case of $800 and a “bear” case of $200. In a recent note, Adam observed that Tesla’s stock might hit both of those prices in the same year. (It almost hit the bear case recently.)
To put Adam’s views in context, he’s by no means the most bullish analyst out there. Cathie Wood, of Ark Invest, has a $2,600 Tesla target. And Elon has said Tesla can become the most valuable company in the world (which, at that price, it would be).
Adam is also not the most-bearish analyst. J.P. Morgan’s analyst has a Tesla target of $150, about half of Tesla’s current price. And Professor Scott Galloway, of “Pivot” and other fame, says Tesla is “a $14 stock.”
Where am I on this debate?
Well, first, I think Adam Jonas is way too optimistic in his bear case of $200.
I think, if Tesla continues to struggle in its core car business — and fails to get robotaxis and humanoids off to a promising start — Tesla will increasingly be valued like a struggling car company. And if Tesla is valued like a struggling car company, I think the stock could fall to, say, $50. Or $25. Or $10. Or even $0.
Why do I think that?
Because car companies — even car companies that aren’t struggling — tend to trade at a tiny fraction of the earnings and cash-flow multiples that Tesla’s stock trades at.
Ford, for example, is an excellent car company. It’s a car company that, in stark contrast to Tesla, is growing and gaining share (including in EVs).
Ford’s stock trades at a trailing P/E of… 7X.
That’s 7X, not 70X.
And it’s a multiple of earnings, not revenue.
What Ford’s P/E multiple means is that, if you bought the whole company, and its annual earnings stayed the same, in 7 years you would get your money back.
Tesla’s stock, meanwhile — even in the company’s hobbled state — trades at a trailing P/E of 165X.
That’s 165X, not 16.5X.
And that’s based on last year’s earnings — before the company’s earnings collapsed.
So if you bought all of Tesla, and earnings stayed the same as last year’s, you would have to own it for 165 years to get your money back.
If you think P/Es are the wrong multiple to use, you can also look at price-to-free cash flow (P/FCF) or enterprise-value-to-ebitda (EV/EBITDA) or price-to-revenue (P/R). And you’ll see less extreme versions of the same.
So, if Tesla were valued like a car company, it’s stock might trade at, say, 20X earnings, or $35 — more than 80% below the current price.
And if Tesla were valued like a struggling car company, well, then, the stock price could go even lower. Say, 10X earnings ($15). Or, if Tesla ends up like car companies that get in real trouble — namely, bankrupt — it could go to $0.
(I don’t think that’s likely. But it’s possible.)
So, I think Adam Jonas is being far too optimistic in his bear case!
But Tesla investors don’t own Tesla stock because they think it has little downside (at least I hope they don’t). They own it because they think it has a lot of upside, based on all the amazing things Tesla might do in the future.
So, let’s take a look at what a Tesla bull like Adam Jonas is expecting for Tesla’s future — what beliefs and assumptions are baked into his $410 price target and $800 “bull case.”
How to justify Tesla at $400 (and $800) a share
Adam’s $410 price target is based on the future performance of 5 Tesla businesses. Importantly, three of these businesses currently don’t exist. One of the others — the car business — is struggling. The 5th, and smallest — batteries and solar panels — is doing well.
The five businesses — and the values Adam places on them — are:
Cars. $75/share. 18% of Tesla’s total value at $410 per share. That $75 value, importantly, requires Tesla’s car business to stop shrinking and start growing again. Fast. So fast that, by 2030, Adam assumes Tesla will sell 2.5X as many cars as it does now — 5 million a year, instead of the ~1.8 million it sold last year.
“Network services.” $160 a share (40% of total value). This is the first and largest of Tesla’s businesses that don’t exist yet (or is small). “Network services’ is a hypothetical subscription service in which Tesla owners and fleet-managers will pay the company $200/month to keep the cars loaded with the latest software. Adam assumes that 65% of Tesla cars will have this service by 2040.
“Tesla mobility.” $90 a share (22% of total value). This is the robotaxi business. It also doesn’t exist yet. Elon has been promising it for 5 years. It’s supposed to finally launch in Austin, Texas, in June. (Exciting!) Adam assumes Tesla will have 7.5 million robotaxis in service by 2040, each earning $1.46 in revenue per mile. That’s up from zero today.
Energy. $67 a share (16% of the value). Solar panels and batteries. This business exists and is growing nicely. But, compared to the car business, it’s small.
Third-party parts and services. $17 a share (4% of the value). This is Tesla selling components and services to others. Adam expects this business to grow but stay small.
Add up the discounted values of each of those businesses, and you get to $410 a share. Grow the car and energy businesses faster — and nearly double the future size and value of the currently non-existent “network services” and “mobility” businesses — and you get to $800 a share.
Throw in another few trillion dollars of value for humanoid robots (which Adam’s assumptions do not explicitly include) and/or a potential merger of Tesla with of Elon’s xAI artificial-intelligence company, and you begin to see how Cathie Wood at Ark might get to her $2,600 Tesla target.
And you also begin to see how Elon might support his contention that, with great execution (which even he regards as challenging), Tesla could one day be the most valuable company on the planet and worth more than the next 5 most-valuable companies combined.
So, would I buy Tesla at $280 a share?
No, I would not.
I already own Tesla, via index funds. I have no interest in owning more at this price.
Why not?
Because, for me, Tesla’s likely upside does not offset its potential downside.
Adam Jonas’s $410 target only represents ~45% upside from Tesla’s current price ($280). And, as the list above shows, to get to that $410 target, you have to make some heroic assumptions about Tesla’s future.
I only rarely trade individual stocks, and I don’t short them. So for me to buy an individual stock with this much upside, I would like to see a likely way to get upside of say, 5X.
Not a possible way. A likely way.
If Cathie Wood and Elon are right, then maybe there’s still 5X or even 10X upside in Tesla. But the possible future that would support that doesn’t seem likely enough that I want to make an even bigger bet on it. Especially when so much of that future is dependent on the ongoing life, genius, health, and attention of one already overstretched mortal human (Elon).
But I’m rooting for Tesla!
As an optimistic human who is excited about the future and in awe of what Elon and Tesla have already accomplished, I’m rooting for them.
And I look forward to diving into other Tesla questions in the days ahead.
Remember…this is not investment advice! I have no idea what your personal investing circumstances, goals, and risk-tolerance are. I think the best approach for most individual investors is to own a diversified portfolio of low-cost, tax-efficient index funds. That’s mostly what I do. But it’s also not investment advice.
Thank you for reading Regenerator! My email is hblodget@regenerator1.com. My inbox and mind are always open!