TSLA: Better Buy: Tesla vs. GreenPower Motor

When investors look to buy stocks, they would ideally like to generate market-beating returns. This means you need to invest in companies that are growing at a faster pace compared to the broader market.

Investors basically need to identify companies that are part of a rapidly expanding market with multiple revenue drivers. Growth stocks have built massive wealth for long-term investors in the last decade. For example, shares of Amazon (AMZN) and Netflix (NFLX) have returned 1,570% and 1,740% respectively since January 2011.

These two companies have expanded sales and earnings at an enviable clip allowing them to increase shareholder wealth at an exponential rate. While tech companies have ruled the roost for a significant portion of the last decade, there are several sectors that are rapidly expanding right now.

One such sector is the electric vehicle (EV) space that has a number of potentially high-growth companies. The EV space is still at a nascent stage and the shift towards clean energy is expected to accelerate demand for battery-powered vehicles in the upcoming decade and beyond.

Here, we compare two companies part of the EV space. One is Tesla (TSLA), which is already the largest automobile player in the world (in terms of market cap), and the other is GreenPower Motor Co. Inc. (GP), which is a small-cap Canada-based company.

Tesla stock has gained a stellar 17,470% since January 2011

Tesla has been a top-performing company for quite a while. It has in fact returned a staggering 17,470% in the last 10 years. This means a $1,000 investment in Tesla stock back in January 2011 would have been worth around $175,000 today.

Tesla delivered less than 500,000 vehicles in 2020 and all eyes will be on the company’s Q4 results that are expected on January 27. Tesla stock was recently added to the S&P 500 index after it reported adjusted net profits for five consecutive quarters.

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In the trailing 12-month period ending September 30, Tesla’s free cash flow was $1.9 billion. In Q3, Tesla derived $1.4 billion in free cash flow and $874 million in adjusted net income. In the December quarter, Tesla delivered a record 180,574 vehicles, up 61% year over year.

Investors will also be watching the management guidance for vehicle deliveries in 2021 which might accelerate given Tesla’s focus on expansion and addition of production lines. Total deliveries in 2020 were up 36% year over year in 2020.

Tesla’s remarkable run has meant the stock is trading at a premium. It’s valued at a market cap to 2021 sales multiple of 17.4x and a price to earnings ratio of 208x. Analysts tracking the stock have a 12-month average target price of $519 which is 38.6% below its current trading price.

GreenPower Motor has surged higher by 1,630% in the last year

Shares of GreenPower have also gained massive momentum in the last year, soaring 1,630%. The company designs, manufactures and distributes EV powered vehicles for commercial markets.

In Q4 of 2020, the company produced 95 vehicles and the CEO said, “During the most recent quarter we continued to ramp production considerably and that trend is expected to continue as we align with an anticipated increase in deliveries in the late spring and summer of 2021.”

According to GreenPower, the annual shipments in the commercial EV space are forecast to reach 50,000 by 2025 indicating it has enough revenue drivers and an expanding addressable market to increase top-line growth. GreenPower has an asset-light business model which means the company can benefit from a high operating leverage as well as economies of scale.

Analysts covering the stock expect GreenPower to increase sales by 48.3% to $20 million in fiscal 2021 and by 154% to $51 million in fiscal 2022. They have a price target of $24.58 for GreenPower which is 33% above the current trading price. With a forward price to sales multiple of 15.3, GreenPower is also valued at a premium.

The verdict

We can see that Tesla and GreenPower are both trading at steep valuations. Over the long-term, both the companies are expected to outperform the broader markets given the transition to EV-powered vehicles at the global level. However, due to their lofty valuations, both the stocks might lose a significant portion of their market value in case the markets turn bearish.

I believe that Tesla is a better investment right now. While Tesla is an established company, GreenPower is still just starting out. Tesla has the leadership position, a strong management team, and a visionary CEO in Elon Musk.

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TSLA shares rose $14.17 (+1.68%) in premarket trading Wednesday. Year-to-date, TSLA has gained 21.44%, versus a 1.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...