Tesla Shares Are Now at Their Most Attractive Valuation Level Since the Depths of the COVID-induced Market Crash

Rohail Saleem
Tesla

This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.

Tesla is currently facing a confluence of diverse short-term headwinds, ranging from the Twitter debacle overhang to uncertainty around the fourth-quarter deliveries, even as the broader market continues to suffer under an onslaught of macroeconomic malaise. With the ensuing correction in Tesla’s erstwhile lofty valuation, the stock is currently at veritable bargain price levels.

Tesla shares are down around 48 percent so far this year. Relative to the post-pandemic all-time high back in November 2021, the stock is down around 50 percent. This carnage means that Tesla shares are now just around 5 percent above their lows during the depth of the COVID-19 market crash, thereby translating into a very attractive valuation scenario for investors.

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Apart from the broader macroeconomic malaise, Tesla shares are suffering from two critical short-term challenges. First, as we noted in a dedicated post last week, Elon Musk has to secure $24.51 billion in equity financing for his Twitter takeover deal. So far, he has accumulated $15.4 billion by selling a part of his Tesla stake in two distinct liquidation waves, with the first one occurring in April – May and the second one taking place back in August. He has also secured $7.1 billion in equity commitments from the likes of Larry Ellison, Binance, Sequoia, the Saudi Prince Al Waleed, etc. However, this still leaves a $2 billion deficit without accounting for Twitter’s RSUs – which will increase the funding shortfall to around $5.4 billion. Musk will likely plug this shortfall by further paring his Tesla stake, hence the current downward pressure on the stock.

As far as the second major headwind is concerned, Tesla missed analyst expectations regarding its Q3 deliveries. While the quarterly production at 365,923 came in higher than Bloomberg’s estimate of 359,853 units, the reported deliveries of 343,830 units missed the consensus number of 357,938. Tesla cited logistical constraints for falling short on its quarterly deliveries. However, given the ongoing global macroeconomic weakness and the softening of demand, especially in China, which is a critical market for Tesla, the stock is understandably under pressure.

Nonetheless, this weakness has now translated into a very attractive valuation profile for Tesla, with the stock currently trading at a forward P/E ratio of just 34.94x – the lowest since the depths of the COVID-induced market crash. With Tesla continuing to project that its annual EV deliveries will grow by 50 percent for the foreseeable future, the stock’s current valuation constitutes a bargain.

Moreover, given the heightened volatility in Tesla shares recently, demands for a share buyback program continue to grow. This is important as the EV giant now has the financial resources to implement such a program. To wit, as per the estimates by Gary Black, the managing partner at the Future Fund LLC, Tesla will have $9.932 billion in free cash flow for FY 2022. For FY 2023, this metric is expected to increase to $20.773 billion, providing a sufficient cushion for the EV giant to start reinforcing value to shareholders.

Should Tesla announce a share buyback program at its upcoming Q3 2022 earnings call, the stock is likely to respond very positively. This places another sheen of attractiveness on the stock’s current valuation metrics.

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