How Low Can Tesla Go?

2022 Year-to-date shares of Tesla (TSLA) are down 66%. The question everyone is wondering is, "Can Tesla fall more?" The simple answer is yes. Any stock, even one with a cult-like following, can go to zero.

The question we should be asking is, when is Tesla stock fairly valued? Or even better, undervalued? Having an idea of what price Tesla should be valued at will give investors a better idea of when they should buy or sell. And really, the only time you buy or sell should be when a stock is overvalued or undervalued.

The problem is that valuing a stock is not cut and dry. Nearly every investor will inevitably come up with a different value for a stock, even if they are using the same data to do their valuations.

With that in mind, let us look at one way of valuing Tesla and determine if it is over, under, or fairly valued.

Today we will be using a comparison method of valuing Tesla. We will look at what Tesla does, compare its business to other companies operating in the same industry or industries, and determine if Tesla is appropriately valued based on its competitors.

Tesla is more than just a car company. I know you have all heard that before. Tesla considers itself a car company and an energy generation and storage company. So let us first compare Tesla to other solar energy generation and storage companies, and then we will tackle the car company side of the business.

A few years ago, Tesla purchased Solar City. A solar panel company that installs solar panels on residential and commercial buildings and has add-on battery storage components.

We can compare this side of Tesla's business to First Solar (FSLR). First Solar makes, installs, and maintains solar panels just like Solar City does for Tesla. First Solar is valued at just under $16 billion and has a price-to-earnings ratio of 165.

However, Tesla and Solar City also sell backup batteries that can be installed in a home. These batteries would be used during power outages or when solar panels aren't generating power, such as at night.

A comparison company for this would be Generac Holding (GNRC), which also sells power backup products, mainly generators, but they have battery backup systems for solar panels. Generac currently trades for $6.5 billion and trades at a P/E of 15, much more reasonable than First Solar.

So we can say that Solar City falls in a generous valuation of roughly $22.5 billion.

Now Tesla, the car company side of the business. But most will argue that Tesla doesn't compare to Ford and GM when you look at their products as a whole. Companies like Ford (F) and General Motors (GM) are currently valued at around $45 billion and $47 billion, respectively. Unfortunately, though, no other car company compares that well to Tesla. So for argument's sake, let's use the largest car manufacturer in the world, Toyota (TM).

Toyota Motors is currently valued at $187 billion with a P/E of just 10. In 2022 from January to October, Toyota produced 7.49 million vehicles. During that same timeframe in 2022, Tesla produced around 900,000 vehicles. So we will call Toyota seven times larger than Tesla in terms of vehicles sold. However, Tesla has a market cap of $375 billion, com[pared to Toyota's $187 billion.

Even if we back out the $22.5 billion that we already said Solar City was worth to Tesla's stock price, that still leaves us with a value for the Tesla car business at $352.5 billion.

Many will argue that Tesla is a growth company and that the business is growing rapidly; thus, it deserves a premium to the competition. I agree with that, but the premium Tesla currently has almost double what Toyota has, despite it selling way more vehicles. That is $165.5 billion more than Toyota, a car company selling more than seven times the number of vehicles Tesla sold in 2022. I believe that if Tesla traded at the same valuation as Toyota, despite selling fewer vehicles, it would be more realistic.

Now to convert all of that to what I believe Tesla should be valued at. I will call it $200 billion. At Tesla's current share price of $120, the stock will need to fall roughly 53% or to a price of around $64.

With all that said, yes, I believe that despite Tesla's stock falling 66% in 2022, it is overvalued and has another 50% to fall.

Whether you agree with me or disagree and think Tesla will go higher, there are a few new Exchange Traded Funds that you can buy that will give you direct exposure to Tesla, both long or short.

If you agree with me and think Tesla still has a long way to fall, you can buy the Direxion Daily TSLA Bear 1X ETF (TSLS) or the AXS TSLA Bear Daily ETF (TSLQ). Both of these ETFs will increase in price if Tesla's stock continues to decline.

If you think I am wrong, which I may be, you can buy the GraniteShares 1.25X Long TSLA Daily ETF (TSL) or the Direxion Daily TSLA Bull 1.5X Shares (TSLL). Both of these ETFs will go up in price if Tesla's stock reverses course in 2023 and goes higher.

Regardless of what you think about my determination of Tesla's stock price, as an investor, you should have a valuation method or methods to help you determine at what price you should be paying or selling a company.

The comparison method I used above is just one of many that I like to use when determining where to invest. If you are not using some valuation method, then you are just randomly buying and selling stocks at different prices, and you are no better off than throwing darts are a board to pick stocks to own.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.