Have Investors Already Priced In Automobile Growth For Tesla Inc (NASDAQ:TSLA)?

Tesla Inc (NASDAQ:TSLA), a USD$58.35B large-cap, operates in the automobile industry whose long product cycles and deep capital investments make planning ahead a difficult endeavour. New opportunities driving future growth in the auto sector is connected and intelligent cars, in particular, web networking, sensors and software, which is not the traditional focus for most automobile companies. The limitation of automobile incumbents is an opportunity for tech giants such as Apple and Google to develop their own software components behind networking, autonomous and communication capabilities of automobiles. Automobile analysts are forecasting for the entire industry, a strong double-digit growth of 17.60% in the upcoming year , and a robust short-term growth of 24.52% over the next couple of years. This rate is more than double the growth rate of the US stock market as a whole. An interesting question to explore is whether we can we benefit from entering into the automobile sector right now. Below, I will examine the sector growth prospects, and also determine whether Tesla is a laggard or leader relative to its automobile sector peers. See our latest analysis for Tesla

What’s the catalyst for Tesla’s sector growth?

NasdaqGS:TSLA Past Future Earnings Jan 19th 18

The increasing presence of tech firms in the auto industry cannot be overlooked or discounted by OEMs. In the next decade, software integration will likely have a significant impact on the auto industry, given the alignment of their expertise – they are adept to connecting value-add components to created networks for information, efficiencies and experiences. In the past year, the industry delivered growth in the twenties, beating the US market growth of 10.76%. Tesla lags the pack with its negative growth rate of -37.01% over the past year, which indicates the company has been growing at a slower pace than its automobile peers. Although Tesla is poised to deliver a 9.19% growth next year, moving it from negative to positive territory, it still lags its industry average rate of growth of 17.60%.

Is Tesla and the sector relatively cheap?

NasdaqGS:TSLA PE PEG Gauge Jan 19th 18

Automobile companies are typically trading at a PE of 13x, lower than the rest of the US stock market PE of 20x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Furthermore, the industry returned a higher 14.24% compared to the market’s 10.46%, potentially illustrative of a turnaround. Since Tesla’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Tesla’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? Tesla is an automobile industry laggard in terms of its future growth outlook. If your initial investment thesis is around the growth prospects of Tesla, there are other automobile companies that are expected to deliver higher growth in the future, and perhaps trading at a discount to the industry average. Consider how Tesla fits into your wider portfolio and the opportunity cost of holding onto the stock.

Are you a potential investor? If Tesla has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth is expected to be lower than its automobile peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at Tesla’s future cash flows in order to assess whether the stock is trading at a reasonable price.

For a deeper dive into Tesla’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other automobile stocks instead? Use our free playform to see my list of over 50 other automobile companies trading on the market.

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