One analyst thinks Tesla could be a zombie company - a company that goes nowhere in value over many years. Is he right?
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Could Tesla Be a Zombie Company?
There used to be fear around Tesla that its products were too different from normal gas cars and that they were too reliant on regulatory credits. Back in 2013, a long time pessimist of Tesla Stock, David Trainer, thought Tesla was over valued when it was $11 per share.
Many of the fears of Tesla in the past were that its product was too different and that it was burning through too much cash. However, people failed to see the genius that was the Model S and the eventual Model 3 in what was the first mass production electric vehicle.
David Trainer says that rising rates are a concern and that when they rise, growth companies lose value. He says that high valuations and rising rates create zombie companies, a company that has nowhere to go in that environment. He notes that Tesla is larger than all the other auto makers.
The larger Tesla gets with its cars, the more it will get treated like another auto stock. If Tesla starts to get that big, its operating margins and profits will start to match those of traditional auto stocks. He justifies a share price for Tesla of $90 because of this.
What Is Really Going On?
David Trainer says that Tesla will lose operating profit as Tesla increases sales. If Tesla has to release a lower priced car, Tesla will make lower margins off that lower priced car. Further down the road, if Tesla gets really big, growth could stall. As growth stalls, investor gives the company a lower multiple.
There are a few flaws in David's model. Tesla has been disciplined in increasing their operating margin. For every $1 billion of cars that Tesla sells, Tesla makes over $200 million in operating profit. This will further increase with software sales and FSD. Many experts think that Tesla will not be able to keep this up.
If someone says that Tesla's operating margins are going to get to 5% to 10%, that is their outlook on the company. It is their prediction of where Tesla is going to go. Many investors don't think FSD is real and they don't think Tesla is in the lead for FSD. With that type of view, you won't look at Tesla as a unique company where a decent multiple is paid.
A lot of the bull case for Tesla is the operating margin continuing to stay at 20% and they grow auto sales in the 10 to 20 million per year range, then Tesla will rise in value. If Tesla is successful with FSD and robotaxis, you have a large margin there if the execution works well.
Tesla is very aggressive with each new factory and continuing to find new ways to manufacture vehicles. Tesla is also creating a robotaxi vehicle platform that will allow Tesla to make more high volume vehicles. Tesla has a culture of solving difficult problems, cutting costs, and revolutionizing human transport.
Will Tesla surprise and rise above being a zombie company, or will Tesla become a zombie company?
For more information, see this video from Dave Lee:
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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.
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