Shares of Tesla (TSLA 1.11%) have shed 26% of their value year to date. It’s partly because of a broader sell-off linked to unfriendly macroeconomic conditions and company-related issues like supply chain restraints and factory shutdowns, which have halted production in recent quarters. The electric vehicle (EV) leader eclipsed a market capitalization north of $1 trillion at the end of 2021, but it now carries a market value of around $842 billion.
As long-term investors, however, we should be less concerned about short-term noise and more focused on the long-term trajectory of a business. That said, with the global EV market set to expand at a compound annual growth rate (CAGR) of 18.2% through 2030, according to Allied Market Research, Tesla looks to be advantageously positioned to capitalize on the rising trend.
Let’s examine the EV juggernaut’s current situation and discuss its potential path to a $2 trillion market value by 2025.
A second-quarter update
Tesla reported second-quarter earnings after the market closed on July 20, and although growth wasn’t exactly ideal, it was in line with what analysts were expecting. The EV leader increased revenue by 41.6% year over year to $16.9 billion, finishing in line with Wall Street estimates, and its adjusted earnings per share climbed 56.6% to $2.27, handily beating forecasts by 27%.
Production and deliveries increased by 25.3% and 26.5%, respectively, year over year, but both retreated 15.3% and 17.9% from the previous quarter.
The slump in production and deliveries compared to the first quarter was attributed to the COVID-related shutdown in its Shanghai factory and ongoing supply chain bottlenecks, which have continued to hurt the global economy for quite some time now.
But despite existing problems, which I view as short-term issues anyway, Wall Street analysts project the EV mogul to grow its top and bottom line by 57.4% and 74.2%, respectively, for the full fiscal year. Those are impressive growth rates for a company facing an array of headwinds at the moment, and in my opinion, investors should be optimistic about what Tesla can accomplish once the economy clears up.
Tesla’s journey to $2 trillion
According to data from S&P Market Intelligence, analysts expect the EV front-runner to generate $164 billion in total sales by 2025, indicating a five-year CAGR of 25.4% from last year’s revenue. Assuming an EBITDA margin of 25%, which translates to an annual EBITDA of $41 billion, the company would have an enterprise value of $2.3 trillion by 2025 at an enterprise-value-to-EBITDA multiple of 55.6, which is where Tesla trades today. That represents 175% upside from its current enterprise value of roughly $829 billion.
At an enterprise-value-to-EBITDA multiple of 151.3, which is Tesla’s five-year average, the company’s enterprise value would reach $6.2 trillion, assuming it generates an EBITDA of $41 billion by fiscal 2025. It’s not entirely realistic that the EV company would trade at such a high multiple several years from now given that its growth will likely decelerate.
A more conservative multiple of 25, which is still a premium to that S&P 500‘s average of 17.1, would yield an enterprise value estimate of $1 trillion. This is only 23.7% higher than its value at the moment. Although Tesla stock has historically demanded premium multiples, it is hard to say where the stock will be traded many years down the road. That said, its recent sell-off, combined with the company’s firm positioning in a rapidly growing market, should catch the attention of prudent investors today.
Should investors buy Tesla right now?
It’s impossible to know for sure if or when Tesla will surpass a $2 trillion market value, but given its superior positioning in a massive secular growth industry, I’m confident that the company will eventually reach that point. In my opinion, its fresh pullback has granted investors a nice window of opportunity to acquire the stock, especially considering its business continues to expand at a rapid clip.
Certainly, the stock could sink lower in the coming trading sessions, but let’s bet on the company’s long-term future rather than trying to time the market. At existing levels, I think Tesla is a firm buy for patient investors.