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Tesla and Its Intrinsic Value

October 16, 2020 By Mircea Vasiu

Tesla is one of the biggest performers of the year so far. When the stock market crashed in March, Tesla went down with it too. 

However, at the same time, buyers stepped in. The chart below shows the number of Robinhood users that hold Tesla in their portfolios when compared with Tesla’s share price performance.

Before anything, Robinhood is a brokerage in the United States that let us users buy fractional shares. In other words, you do not need to buy one share of Tesla worth $2000 (before the later split), but you can simply invest $10 or $100, and the broker allocates a fraction of that share according to the amount invested.

What is astonishing on the chart above is that the retail traders did support Tesla on its way up. Also, this is the data from a single brokerage house – imagine all the funds pouring in from the United States and abroad, and you will have a picture why Tesla outperformed the market.

Tesla Is Up Over 450% This Year Alone – Is There Room for More?

The intrinsic value of a stock price offers a clue if the shares are overbought or oversold. For this, fundamental analysts use all kinds of metrics (e.g., CAPM – Capital Asset Pricing Model, DDM – Dividend Discount Model) to discount future cash flows to present times and see where the current price stands when compared to the resulting intrinsic value.

Some investors consider Tesla overbought by all levels. If we look at the company’s profitability, there is little or no profit coming from the car selling business. But if one looks at the potential, things have a different dimension given the optic.

Ron Baron of Baron Funds said in a recent interview that the company could easily grow at a 50% CAGR, only considering the cars it sells. If you add the batteries too, it could exceed $2 trillion in market cap. Ron Baron is a stockholder of Tesla, so maybe he is a little way too optimistic. But he was right to invest in Tesla when everyone and their mother thought the company would fail and that building cars in a “tent” in America will simply not work.

It worked, and Tesla now builds cars in China too. Moreover, it prepares to build cars in Berlin, Germany, in the heart of its major competitors’ market – Germany.