Tesla (TSLA +0.96%) shares deserve to trade at a huge premium to Ford Motor's. Even Tesla bears agree on that. After all, Tesla's vehicle sales are growing much faster than Ford's. But what, exactly, should that premium be? And how fast will earnings grow in the coming years?
On these points, one analyst has an extremely different view from the rest of Wall Street. GLJ Research analyst Gordon Johnson's price target for the electric-car maker's stock is about 90% below where shares trade today, even though he's assigning a much higher forward earnings multiple to Tesla than to Ford. He just expects much lower earnings in the coming years, and a substantially lower valuation premium than the market is pricing in.
NASDAQ: TSLA
Key Data Points
Tesla stock: Worth less than $24?
Johnson has a sell rating on Tesla stock and a 12-month price target of $23.53. He arrives at this price target by applying a price-to-earnings (P/E) multiple of 15 to his estimate of Tesla's earnings in 2025, then discounting that price back to today using a 9% discount rate. This is actually a huge premium compared to the P/E that Tesla's peers Ford and General Motors trade at: The two auto companies have P/E ratios of about 5.
Highlighting the difference between Johnson's view and the market's, Tesla now trades at 68 times trailing-12-month earnings. Trading at a P/E of 15 implies a significant contraction in this key valuation multiple. Also note that Johnson's forecast for Tesla's 2025 earnings per share is far below what most analysts are modeling. The consensus analyst forecast calls for Tesla's earnings per share to rise sharply, hitting a record $4.98 in 2025. Applying a price-to-earnings multiple of 15 to this and discounting it back by 9% would result in a fair value of about $63 today.
Who is right?
With the average analyst price target currently sitting at about $227, Johnson's extreme view is at least worth some consideration. The difference between Johnson's approach and Wall Street's valuation of Tesla shows how much the growth stock depends on the market's high hopes for continued rapid growth -- both from electric cars, and from other segments like battery storage, solar, and vehicle software. Living up to its valuation will require massive growth from the company for the foreseeable future, both to drive earnings and to continue commanding a high valuation multiple.
Giving Tesla bulls some credit, if what Tesla says about its growth expectations pans out, the company may be able to live up to the market's high expectations. Management regularly tells investors that it aims to grow vehicle production at a compound average annual growth rate of 50%. Since it set this target in 2021, it's exceeded this goal.
But recent growth has slowed substantially, with third-quarter production and deliveries rising 18% and 27% year over year, respectively. The company will need to accelerate its production and delivery growth to prove to Wall Street that investors should keep paying such a high multiple for the stock.
This should be a critical year for Tesla investors as they try to decide how likely the company is to return to substantially higher growth rates. If growth slows further, investors may need to revisit earnings forecasts and possibly lower the bar for what multiple they expect the market to assign to the stock. Time will tell whether earnings will be as disappointing as Johnson expects, but if they disappoint at all, then Tesla's P/E ratio could contract significantly.
