Down 70%, is the Tesla share price a bargain?

In November 2021, Tesla Shares of TSLA (NASDAQ:TSLA) closed at $409.97. Since then, they are down 70% – and are currently down in pre-market trading.

I think there’s a strong case for thinking the stock is a bargain.

Investment

Investing in business is not about betting on stock prices. Any stock can go up or down for any number of reasons.

This is like Tesla like any other stock. The fact that a stock is down 70% from its highs doesn’t mean it can’t go down again.

One of the reasons Tesla’s stock has fallen recently is that CEO Elon Musk is selling the stock. But the investment proposition comes down to the business itself.

Investing in a company’s stock involves owning a part of the underlying business. For investors, the return of the company’s cash returns to the shareholders.

Whether or not a company’s stock is a bargain therefore explains whether or not it will generate enough cash in the future to justify its current price. So what about Tesla?

return

First things first – how much cash does Tesla stock have to generate to make it a worthwhile investment? For me, the answer is $13.65bn per year.

Currently, the 10-year UK government bond is coming in at a yield of 3.66%. As a result, Tesla stock should be offered for at least the next decade to become a bargain.

Currently, Tesla has a market cap of just under $382bn. But there is more to stocks than just price.

The company has $8.9bn in debt and $17.6bn in cash on its balance sheet. That gives the company a value of around $373bn.

A 3.66% annualized return on $373bn in costs translates into $13.65bn in free cash each year over the next decade. This is what I think Tesla needs to produce in stock to be a bargain right now.

If interest rates go higher (as I think they will) then the equation could change. But with bond yields everywhere, that’s what I’m looking for from Tesla as a potential investor.

Share Tesla

Over the last 12 months, Tesla has generated $8.9bn in free cash. That’s less than the $13.65bn that should average out as a bargain for investors.

For an average of $13.65bn per year, the company needs to increase free cash flow by around 10% per year. So can Tesla do it?

I think there’s reason to think that’s possible. The company has grown its profits by about 44% annually over the past five years.

On top of that, margins have grown. As a result, free cash flow has grown faster than revenue.

The company just announced that deliveries for Q4 2022 fell short of expectations. But they are still up 30%.

Stocks to buy?

A recession is likely to challenge Tesla’s growth, but 10% per year doesn’t seem overly demanding to me. As a result, I think stocks are undervalued compared to government bonds.

However, I think there are better opportunities for my portfolio now. At today’s prices, I hope to return more than Meta platform, Amazon.comand Alphabetso i bought this instead.