One method to play Tesla (NASDAQ:TSLA) this year, specifically if you believe TSLA stock is going to increase from here, is to purchase its LEAPS (long-term equity anticipation securities). These are simply long-dated options that are deep-in-the-money.
Source: Tudoran Andrei/ Shutterstock.com For instance, if you think TSLA is going to increase 50% to roughly $1,212 per share, then it’s possible that those LEAPS will increase 73%. In impact, you get more leverage, both on the benefit and disadvantage.
However very first let me show you the standard reason why I think TSLA might increase to more than $1,200 per share, from its price at this writing of $816.12 per share.
How To Value Tesla Stock
Usually, Tesla offers a yearly delivery or sales projection for the year. Last year Tesla stated it planned on hitting 500,000 in shipments. For instance, this is the goal specified on page 10 (Outlook area) of its Q3 slide discussion.
In Q4 and all of 2020, Tesla satisfied that objective. However, in its Q4 presentation, the EV maker did not offer a concrete 2021 objective. Instead, on page 11 of its slide deck, Tesla said it intends over a multi-year horizon to “accomplish 50% typical yearly growth in lorry deliveries.”
That is less particular but likewise a really high goal. For our purposes, let’s streamline things. Let presume that is the goal for the next 10 years, and also presume that it expects to achieve 50% growth each year in sales.
Really, to represent lower typical automobile prices, let’s lower this by five percentage points to 45% typical annual development. This means that this year’s sales of $10.74 billion at Tesla will become $441 billion by 2030.
As Tesla has 959.95 million shares outstanding since Feb. 1 (according to its 10-K filed on Feb. 10), the marketplace cap for TSLA stock is $783.3 billion.
Therefore, in 10 years, the price-to-sales ratio for TSLA stock today is just 1.77 times (i.e., $783 billion divided by $441 billion sales in 2030). This is really low-cost; in reality, it’s way too low-cost.
Marking Down Future Value
However, we require to make two adjustments to these numbers. First, the actual number of shares utilized to determine incomes per share is 17% higher, due to in-the-money options, limited stock systems, and so on
. That is what page 31 of the earnings slide covers. Therefore, its totally watered down market cap is $917 billion. This raises the price-to-sales numerous to 2.1 x.
You can see these computations for Tesla’s market cap in the table above.
In addition, we require to lower in 2030 by a discount element, in order to consider dangers and the alternative usage of the money till then.
That reduces its revenue to $170 billion and raises the totally watered down price-to-sales several to 5.39 x.
Now, in the following table, you can see that the adjusted price-to-sales numerous is 5.4 x. That is still very cheap.
Determining Value On Hitting Sales Goal
A better value would be 8X-10X sales. After all, the company is quickly able to keep on producing electric vehicles over the next 1o years by then.
For that reason, if we use an 8X price-to-sales numerous, the marketplace worth would be equal to $1.13 trillion, or $1,211.94 per share. That is 48.50% above today’s rate.
Bear in mind that this is a really easy design. It does not take into numerous otherwise choosing factors, consisting of totally free cash flow, deliveries, and margins.
But the point is to see what the order of magnitude of the stock gain need to be over the next several years if Tesla fulfills this 50% objective.
LEAPS Offer Cheaper Direct Exposure
A more affordable method to acquire direct exposure to Tesla is to purchase future-dated (over a year from now) options that have deep-in-the-money exercise rates. These are referred to as LEAPS.
For example, since Feb. 12, the Sept. 16, 2022 call options with a $700 exercise rate have an asking cost of $333.40. There are likewise over 1,110 agreements exceptional, so there is plenty of liquidity.
You can see this in the screenshot above for the Sept. 16, 2022 call choices at a workout price of $700.
This $333 cost is simply 40.8% of the TSLA stock cost since Feb. 12. To put it simply, if TSLA goes up to $1,212 (the target price) within the next year and 7 months (September 2022), the LEAPS will acquire a better return.
For instance, the $700 Sept. 2022 LEAPS call options will gain 53.7% (i.e., $512 on the $333 cost), instead of 48.5% with owning TSLA stock. Nevertheless, buying the LEAPS will permit you to own 1.44 x as lots of shares (in this case choices) as purchasing the stock. Therefore the real return will be 77% (i.e., 1.44 times 53.7%). This is much better than a financial investment in TSLA shares.
Certainly, there is substantially more downside danger if TSLA falls to $700 and stays there. The LEAPS would be useless. But in both cases, you would lose roughly the very same quantity of cash (somewhat more with the LEAPS). This is clearly an investment if you believe in the upside capacity of TSLA stock over the next year and a half.
On the date of publication, Mark R. Hake holds a long position in TSLA stock.
Mark Hake blogs about individual finance on Medium and runs the Overall Yield Worth Guidewhich you can review here.