The Case for Value in Tesla Shares | ETF Trends

Tesla (NASDAQ: TSLA) is usually viewed through the lens of growth investing and the stock’s residence in well-known growth benchmarks such as Nasdaq-100 (NDX) and S&P 500 Growth indexes affirms as much. That is to say, rarely are there times when shares of the electric vehicle behemoth are considered value plays.

However, some analysts believe one of those times may be here right now. As a result of value in Tesla stock, there could be implications for an array of Tesla-heavy exchange traded funds, including the ARK Innovation Fund (ARKK). As of March, ARKK allocates 10.29% of its weight to Tesla, roughly 230 basis points more than the fund devotes to its second-largest holding.

No, ARKK is not a value ETF. Far from it, but that some analysts see value in the fund’s largest holding is noteworthy.

At current prices, we view Tesla shares as slightly undervalued, with the stock trading roughly 15% below our fair value estimate. We attribute the selloff to the market’s disappointment at the lack of details surrounding the new affordable vehicle platform as well as the lack of publicly stated long-term financial targets,” wrote Morningstar analyst Seth Goldstein.

The research firm boosted its fair value estimate on Tesla to $225 from $220. The new forecast implies a decent amount of upside from the March 3 close at $197.19. Goldstein cited bullish free cash flow projections mentioned during Tesla’s recent investor day as a potential catalyst for the shares.

“In our view, the more important takeaway from the event is that Tesla’s ability to scale should drive higher long-term free cash flow generation. Tesla’s software-focused operation, including using AI for much of its R&D, should drive long-term operating leverage, leading to margin expansion. The company’s plan to simplify its manufacturing process should reduce its capital expenditure intensity over time,” added the analyst.

Tesla’s ability to generate free cash and bolster its software line could allay investors’ concerns about when the company will bring an economy-class-type car to market. That could be several years off, but Tesla’s value status could benefit other ETFs, including the ARK Next Generation Internet ETF (ARKW) and the ARK Autonomous Technology & Robotics ETF (ARKQ). ARKQ allocates 13.77% of its weight to Tesla and the stock is a top 10 holding in ARKW.

“We increased our outlook for the energy generation and storage business as we think Tesla’s software, including virtual machine mode and auto bidder, will drive higher sales as it will allow excess cost savings versus the installation of solar and a battery alone,” concluded Goldstein.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.