It’s hard to think of a company whose share price divides opinion more than Tesla (NASDAQ:TSLA). Price targets for the stock in 2024 range from $53 at the low end to $380 at the high end.
With the stock firmly in the middle of those two estimates, there’s either massive risk or massive reward for investors buying at today’s prices. But who’s right?
What’s at stake?
The Tesla share price looks set to end the year just above the mid-point between these numbers. That gives the entire company a market value in the region of $790bn.
The low end estimate of $53 implies the entire company is worth around $166bn. That’s still quite a lot – it’s about the same as Disney, or slightly more than HSBC.
A share price of $380 gives the firm a total value of $1.2trn. For context, that’s about the size of Nvidia, or 10 times the size of Unilever.
So which should it be? From an investment perspective, the question comes down to how much cash Tesla is going to generate in the future.
Let’s talk numbers
Right now, UK investors can buy a government bond that will pay 3.7% for the next 10 years. So in order for Tesla to be a decent investment, it needs to be able to generate a better return than that.
At $53 per share, that’s a free cash flow of $6.1bn per year on average. A target of $380 means the company needs to generate $44bn per year.
Tesla has managed $3.7bn in free cash, so it has some growing to do. To get to $6.1bn on average takes around 10% annual growth and $44bn requires annual growth of just over 50% per year.
None of this should be controversial. It’s also clear Tesla is uniquely positioned at the leading edge of some potentially huge technological advances – the only question is what these will be worth.
A screaming buy?
The kind of calculation I’ve been sketching here is how Warren Buffett thinks about investing. But the Berkshire Hathaway CEO has another important rule when it comes to these questions.
According to Buffett, if it isn’t obvious that a company will make enough cash to provide a suitable return, the stock isn’t one to buy. As Buffett puts it, the fact “ought to just kind of scream at you“.
That doesn’t mean that the $380 price target on Tesla shares is too high. It might be that the firm’s ability to grow at 50% from here screams out at the analyst who suggested it.
The fact this isn’t obvious to everyone doesn’t mean it isn’t obvious to anyone. As Buffett points out, each of us has our own circle of competence – the range of things we can judge accurately.
What is Tesla worth?
I don’t have a precise idea of how much cash robotaxis, humanoid robots, and battery technology could generate in the future. So I don’t see the Tesla share price as a screaming buy right now.
According to Warren Buffett, this means I shouldn’t buy Tesla shares at today’s prices. I think that’s sound reasoning, so I’ll look to focus on other opportunities for the time being.
