Tesla Approaches Being A Peter Lynch Stock (NASDAQ:TSLA)

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Perhaps Thesis Peter Lynch is most well-known for his ability to pick 10 baggers. He divided stocks into six categories (e.g. Beating the Street, my favorite), which ranged from turnarounds to stalwarts to fast growers to fast growers. Lynch seems to favor fast-growers. These stocks can increase their annual earnings by 20%+ each year. Multiple times, he mentioned that fast-growing stocks are the best for investors. These fast growers can be riskier.

He provided guidelines to limit the risks. This leads me to my main thesis. In the rest of this article, I’ll explain why Tesla, Inc., (NASDAQ:TSLA), begins to meet these guidelines in current circumstances. I will be focusing on the following:

A leader in an industry that is rapidly growing. TSLA is a major player in the burgeoning space for electric vehicles (“EV”), with years, if perhaps decades of rapid growth ahead. Inventories. Investors can check the inventory level easily, but often they don’t. Inventory data is one of the most reliable financial information, in the sense that it can be less subjectively interpreted. Yet, inventories can be a good indicator of the health and demand for any business. TSLA’s inventory level will show that its products are very popular. It has also been very efficient in managing its large logistical systems despite all its ongoing challenges. An acceptable valuation. The Lynch PEG ratio (P/E multiple dividing by growth rate) is part of daily investing vocabulary. For fast-growing investors, he prefers a PEG of around 1x. TSLA’s current PEG may not be as low at 1x. It is close. It is getting close to 1.8x. This is due to its unique strengths, such as the ones just mentioned. 1. Tesla is a global leader in an industry that is rapidly growing. It has been the world’s largest producer and seller for electric vehicles for many years. Although other major EV manufacturers like General Motors, Toyota, and Volkswagen have been increasing their production and selling electric vehicles in recent years, their numbers are still much lower than Tesla’s. As you can see from this chart. TSLA is the clear leader with Model Y and Model 3 X occupying top two spots in market share with Ford Mustang third.

Its leading position is one I expect to be sustainable for many reasons. The top two are scale and brand appeal.

Tesla is already able to manufacture at a scale that surpasses other manufacturers, as I have argued in earlier articles. This makes it more cost-competitive. With its minimalistic and sleek design, Tesla has built a strong brand and gained a large following. It also continues to introduce “cool” features like autopilot and over the-air updates to keep fans interested and anticipating.

source: electrek.co

2. Inventory control As we have already mentioned, investors should check inventory regularly, especially for those who are fast-growing. It can be used to measure efficiency, customer satisfaction, cash flow management and balance sheet management.

Next, the chart shows TSLA’s inventories as a percentage of its quarterly sales. It is shown in absolute dollars (top panel), days outstanding (midpanel) and in terms of inventory (bottom panel). These results are all Lynch would want to see in a fast-growing company. As you can see in the top panel above, TSLA’s inventory has been growing rapidly in dollar amounts, reaching $12.8B during the most recent quarter.

The middle and bottom panels indicate that products are so in demand and so popular that inventories are lower than average in terms both of days outstanding and percentage of sales. Its current inventory days are around 57 days. This is far lower than its historical average of 79. The bottom panel shows that the current inventory represents only 52.8% of sales, which is far lower than its historical average of 71%.

These results are, in my opinion, very indicative of TSLA’s growth and management’s effectiveness. It has managed to maintain a balance between customer satisfaction (with a reasonable inventory) and cash flow management (without having too much capital in inventories).

Source: Seeking Alpha data

3. Valuation and Lynch’s PEG ratio Below are my estimates of its current PEG (S). These estimates are based on some assumptions that will be explained in detail shortly. Overall, I see a PEG of 1.8x at the moment, which is not as good as the 1x that would make Lynch a great pick. It is justified for its unique strengths, such as the size and brand image of the premium Lynch brand.

Based on Seeking Alpha’s FWD P/E ratio 47.9x, my PEG estimate is shown in the first chart. The EPS has grown at a rate 58% over the last 5 years. Growth rates from the past 10 years don’t apply in this instance. The consensus estimates for its EPS annual growth rate range from 18.8% to 30% in the future. CAGR is approximately 25%. Based on this CAGR, it turns out that the PEG ratio is approximately 1.92x.

Keep in mind, TSLA currently has a net cash position worth $22.1 billion. This translates to approximately $6.7 per share. The cash position accounts for a lower P/E ratio (about 46.3x, compared to 47.9x prior to the adjustment). This adjustment has resulted in a slightly lower PEG ratio (about 1.85x).

Source: Seeking Alpha data

Source: Author based upon Seeking Alpha data

Final words and risks. TSLA investment has a higher PEG ratio than 1x. There are also other potential risks. The EV market is becoming more competitive. TSLA’s current success is due in large part to its early-mover advantage. It was among the first to enter the electric vehicle market and had a substantial first-mover advantage. All major automakers, including heavyweights such as General Motors and Toyota, have begun to increase their production of electric vehicles. As I have already mentioned, Elon Musk’s colorful personality is a double-edged blade. Many things have been criticised by the media. He was also criticised for his Twitter acquisition.

To sum up, I believe TSLA fits into the Peter Lynch fast-growing criteria. It is a leader in a rapidly-growing industry. Its inventory level, according to my view, confirms its healthy growth curve. Its PEG ratio of 1.8x, according to my estimation, does not make it an ideal Lynch pick with 1x PEG. It is justified, however, given Tesla Inc’s superior brand image and scale leader status.

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Title: Tesla Approaches Being A Peter Lynch Stock (NASDAQ:TSLA)
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