Tesla, Amazon, Nvidia May Be 'Extravagantly Priced' But Valuations Are Rational, Investment Firm Says

London-based fund manager ValuAnalysis published a report Thursday, theorizing that companies like Amazon.com, Inc AMZN, Tesla Inc TSLA, and Nvidia Corporation NVDA aren't exactly overvalued even if their shares trade at really high multiples to their earnings.

Link Between Growth And Price: ValuAnalysis says financial analysts have been trained to assume a "fading return” model, which argues that a company's returns diminish over time. However, newer, disruptive companies have the ability to buck this trend and emerge as “antifade” businesses, as per the equity firm.

ValuAnalysis says Tesla, Amazon, and Nvidia might be “extravagantly priced” but its research indicates there is a rationale behind their respective market values and investors tend to discount companies with high growth in comparison to low-growth peers.

Tesla: The report calls the Elon Musk-led company the archetype of a “speculative” stock, citing data that Tesla trades at 16.2 times its net economic assets and 630 times its normalized operating free cash flow.

However, the valuation begins to make sense if we observe the global shift towards electric vehicles. If even 8% of the world’s vehicles in 2025 were electric, then Tesla could end up selling 1.5 million EV units — three times the company’s expected sales this year — and generate profit in excess of $74 billion, as per ValuAnalysis.

If the Palo Alto-based company were to improve margins slightly and capitalize on research and development, it could produce a free cash flow of nearly $6.3 billion and a net rent of 13.4% — leading to shares trading at 61 times the net free cash flow in 2025.

The investment house bases its assumptions that Tesla would be able to maintain its market share in EVs. They, however, see no danger of traditional rivals such as Volkswagen AG VWAGY, General Motors Company GM, and Renault displacing the automaker.

Amazon: ValuAnalysis says Amazon is the most established and largest “antifade” company. The firm generates $21 billion of net free cash flow and trades at 78 times this amount.

The retailer benefits from, what ValuAnalysis calls, the “platform effect” or instant global reach, which it says is generating hypergrowth for global and very large companies such as Amazon and Facebook Inc FB.

The e-commerce giant is able to leverage its platform and has yet to embark on its fading period. The report dubs the company as a two-decade wonder with a CEO who is determined to keep stasis away.

Nvidia: The investment firm said it was yet to assess the acquisition of Arm Ltd. by Nvidia but noted that the Chinese authorities may not be agreeable to the sale. ValuAnalysis referred to the 61.5 times normalized net free cash flow of Nivida as “modest.”

The report said the company’s dominant position in the semiconductor industry and its “fabless” business model should generate a higher rent over time. The company already has a strong position in acceleration and artificial intelligence, along with key verticals such as data centers, autonomous vehicles, and gaming, which has allowed it to deliver almost 30% growth in revenues expected for this year plus give four consecutive quarterly beats.

Related Link: Tesla Remains 'Misvalued,' Says SPAC King Palihapitiya