Is Tesla a Buy at $127 Per Share?

Tesla has been widely criticized in recent days with one hedge fund manager even predicting it will go bankrupt. Others have slammed Musk and his leadership for overseeing a larger than expected drop in deliveries. Still others see BYD as serious competition for Tesla with price rivalry threatening margins and the future of the automaker as a whole.

But one analyst has come out with a price target that may well have cut through the noise and arrived at fair value for the stock. We investigate the merits of the target price.

Key Points

• Tesla has numerous divisions under its corporate umbrella but the vast majority of revenues still stem from Tesla Automotive.
• Skeptics argue that because the majority of revenues come from Tesla’s Automotive division, the stock should be valued similarly to other car makers.
• A Simple Valuation Formula reveals that Tesla may be a compelling buy at $127 per share based on historic analysis.

Is Tesla a Buy?

Bulls like Cathie Wood claim that Tesla is much more than a car manufacturer. They will cite the numerous divisions under the Tesla brand, including Tesla Energy that features solar energy products and storage energy products, as well as Tesla Insurance, Tesla Software and Autonomous Technology (Autopilot Full Self Driving, Software Updates and Infotainment) and Tesla Supercharger Network.

Yet in spite of all the divisions 86% of Tesla’s revenues stem from its flagship division, Tesla Automotive. So shouldn’t Tesla be valued as an automaker with similar multiples? That’s the argument skeptics will make and it’s a fair one that would result in Tesla valued at closer to $100 per share.

But all those other divisions lead to optionalities and much like a call option, the upside could be enormous if any one of them hits big. Even without a lottery ticket win for any of them, a price target can be deduced for Tesla based on where it has historically traded. By so doing, a buy price can be calculated where the reward to risk ratio would be attractive, even if the same cannot be said at today’s prices.

Tesla Price Target

According to one analyst at Nanalyze, Tesla could be a buy at $127 per share. This number was arrived at through a calculation that the team at Nanalyze use, called a Simple Valuation formula. Essentially, it means looking at the market capitalization of the firm and dividing by the most recent revenue number multiplied by 4. It’s not dissimilar to a Price-to-sales ratio but arguably is more accurate in capturing the most recent revenue figure versus including in the formula the revenues from almost a year ago.

The bottom line is when that calculation is made at the time of the most recent Tesla share price low and extrapolated to the current market cap and revenue level, it suggests that Tesla share price has still more to go to the downside before becoming a buy. However, at $127 per share, it really would become an attractive purchase for new shareholders.