Is Tesla Stock a Millionaire Maker?
Key Points
Given how uncertain Tesla's future is, investors have no way of predicting what the business will look like a decade out.
The management team needs to make substantial progress in autonomous driving and robotics.
Tesla's earnings power needs to improve at an exceptional rate to justify the current valuation.
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No one will complain about Tesla's (NASDAQ: TSLA) past performance. Shares in this innovative business have climbed an impressive 2,760% in the past 10 years (as of March 12). That return crushes the market.
There are certainly some early investors who have gotten rich owning this electric vehicle (EV) stock as it made its ascent to global fame and recognition. But is Tesla a millionaire-maker going forward?
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It's impossible to forecast 10 years into the future
Before investors decide to buy any stock, it's probably a good idea to try to figure out what the business will look like 10 years into the future. This exercise forces investors to assess how competitive factors, management's strategy, and financial performance will play out. Obviously, this is much easier for stable and mature companies. It's almost impossible to do for Tesla.
The best-case scenario in 2036 is that Tesla's robotaxi service has scaled and is operating in major markets all around the world. In this extremely optimistic situation, the company might be raking in massive amounts of high-margin revenue. Its autonomous vehicle technology would be the moneymaking offering, not purely selling EVs, as is the case right now.
What's more, there are plans to reach 1 million Optimus robots produced each year, which is hopefully enough volume to bring costs down. There might be tremendous demand for these machines in various settings both for enterprises and for consumer households. This could be another huge revenue stream.
This is exactly how Tesla's bulls are thinking, wishing for a financial windfall in the future. The problem, however, is that no one, not even CEO Elon Musk, has an accurate timeline on when or if these developments will become reality. And this makes buying Tesla stock a shot in the dark.
The EV stock's valuation is a massive hurdle to overcome
Despite that unknown outcome, investors might still want to take a chance on the stock. This would be a reasonable course of action provided the valuation accounted for an uncertain future. If the stock were cheap, it would make sense. This could not be further from the case, though.
Tesla shares currently trade at a sky-high price-to-earnings (P/E) ratio of 367. If that valuation contracted to the S&P 500 index's P/E multiple of 25 in 10 years, Tesla's earnings per share would need to grow at a compound annual rate of 31% between 2025 and 2035 just for the stock to be flat during this decade-long stretch. This calculation demonstrates how much irrational hope the market has.
Investors thinking that this EV stock can turn them into millionaires must temper their expectations.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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