One of the most widely followed stocks in the market is Tesla (TSLA 1.97%). Its success and future potential have driven Tesla's share price to dizzying heights at times. Even after a correction that slashed the share price by more than half last year, some investors wonder if it is still too pricey to buy.
Several analysts have been working recently to quantify Tesla's potential beyond its current electric car business as the company progresses in other areas. That helps give investors a clearer view of what might lie ahead for the business and perhaps simplify any stock-buying decision.
First box checked
Prior to last year's stock correction, Tesla shares soared well ahead of its business success. Investors jumped on board the leader in what was shaping up to be a quickly growing sector with massive market potential.
Electric vehicle (EV) sales have, indeed, taken off, and the global growth is expected to continue for years to come. Tesla has maintained its leadership role even as competition has emerged from both EV start-ups and established automotive manufacturers. So while Tesla's enormous valuation -- it had a $1.2 trillion market cap at its peak in late 2021 -- has decreased some, the company has proven it runs a hugely profitable business.
Data source: Tesla.
Tesla has proven itself worthy of investors' early excitement. In the second quarter alone, Tesla generated more than $1 billion in free cash flow even after spending more than $2 billion on capital expenditures. But the stock remains expensive based on current business fundamentals, with a recent market cap of $865 billion and a price-to-earnings (P/E) ratio of nearly 80.
Underneath the hood
That means investors are still expecting not only continued growth in its profitable EV business and early-stage energy business but also other sources. A recent analysis by Dan Ives from Wedbush looked at the potential for Tesla's Supercharger network as a growing number of competitors have reached agreements with Tesla to open up its charging network to non-Tesla vehicles.
Ives told clients he believes that will generate $10 billion to $20 billion in annual revenue by 2030.
Separately, Adam Jonas, the widely followed Morgan Stanley automotive analyst, just adjusted his firm's projections for Tesla based on its artificial intelligence (AI) technology. In his note shared by Barron's, Jonas told clients, "In its quest to solve for [vehicle] autonomy, Tesla has developed an advanced supercomputing architecture that pushes new boundaries in custom silicon and may put Tesla at an asymmetric advantage in a $10 trillion total addressable market." That prompted Jonas to bump his firm's price target on the stock from $250 to $400 per share.
There's a lot of optimism in that thinking, and investors should take it with a grain of salt. Tesla dubs that computing technology Dojo, and Elon Musk said in the second-quarter conference call that the company plans on spending well over $1 billion through next year to gather data for Dojo to continue to expand training the supercomputer.
Simplify your thinking
Deciding whether or not to add Tesla stock to a portfolio at these levels boils down to your thoughts on those analyst estimates, the success of Musk's plan for autonomous vehicles, and the potential to market its software elsewhere. So far, the Tesla CEO has been overly optimistic about when Tesla vehicles would be used as a fleet for ride-sharing robotaxis.
Yet, AI technology continues to advance quickly, and it's reasonable to think there will be some amount of adoption for self-driving vehicles in the future. If one believes that's the case and adds in the potential value of Tesla's charging plug becoming the North American standard, the stock is clearly a buy at recent prices.
But less speculative investors might want to base a decision on what we know and not what might come to fruition. Tesla's current business is strong, and the company continues to fend off competition. It is on pace to increase EV production at about a 50% annual rate this year. Even in a Chinese market that has a large amount of existing competition, Tesla grew vehicle deliveries in August by 9.3%.
Even if that growth rate continues, though, investors have pushed the company's valuation high enough to include success from its other potential sources. In other words, buying Tesla stock now might not make sense simply based on its EV business alone. The decision can simply be made based on what else you believe the company has coming in the next several years.
