Tesla Motors Inc., (TSLA) shares have experienced what appears to be a classic short squeeze rally, and in the past several days, the stock has gone parabolic. It is starting to seem like investors are taking a "can do no wrong" attitude with Telsa. This seems similar to what we saw with Apple (AAPL) as it was peaking in share price at over $700, and this could be a sign of a top for Tesla.
There is no doubt that the company has defied skeptics after launching the Model S sedan, but the recent rally seems to be based more on panic buying in a short squeeze rather than on a truly sustainable and fundamentally sound valuation. With the shares now trading at nearly three times the price of where the stock was at in March, investors and shorts should reconsider the current risk/reward profile and valuation of Tesla.
Tesla has a handful of models either for sale or in design stages and it now sports a market capitalization of over $10 billion. That appears very rich when considering the relatively limited product line, current revenues and earnings forecasts. Analysts expect Tesla to earn about 5 cents per share in 2013 and $1.08 for 2014. That implies a price-to-earnings ratio of nearly 90 times for next year, which is a huge premium to other major automakers. For example, Ford (F) and General Motors (GM) trade for around 10 times earnings estimates for this year and even less for next year.
The valuation of Tesla seems even more incredible when you compare its over $10 billion market capitalization to another much larger carmaker. For example, Fiat SpA (OTC:FIATY) has a current market capitalization of less than $8 billion. Fiat has a very extensive product line and it also owns Chrysler, Jeep, Dodge, Alfa Romeo as well as two of the world's most exclusive sport cars brands, both Maserati and Ferrari.
Owning a Tesla might be cool, and owning Tesla stock has been very cool for the past few weeks, but investors have to ask themselves if the valuation has reached nonsensical levels when the market capitalization of Tesla now exceeds that of Fiat, Chrysler, Jeep, Dodge, Alfa Romeo Maserati and Ferrari, combined. If you had around $10 billion to hypothetically buy either Tesla or Fiat and all the other brands it owns, which one would you choose? For me, the answer is simple...Fiat. As for the cool factor, yes, Elon Musk and Tesla have it, but so do Enzo and his Ferraris.
Most stocks go down after a capital raise is announced, but when Tesla announced one just days ago, the stock went up. This is either a sign of real strength or a sign that some investors have lost their marbles. When a company sells more stock, it dilutes existing shareholders. I think this response to the secondary offering supports the theory that investors are taking a "Tesla can do no wrong attitude" and when stocks reach this status (as Apple did), it is often the sign of a top. Tesla said it would sell about 2.7 million new shares and Elon Musk said he would buy $100 million worth of stock. Is this a nice gesture, a serious investment, or is it just a gimmick? Considering Elon Musk's net worth it seems like merely a token gesture. However, he is incredibly capable and shorts are paying a heavy price for doubting his abilities.
In another sign that investors seem to be taking a lax attitude on Telsa, a recent CNBC article points out that the earnings quality receives an "F" according to Gradient Analytics. This is due to factors such as warranty accruals, which could be an issue if the company is perhaps overly optimistic and is underestimating these expenses. In regards to Tesla's recent quarterly report, the article states:
All in, Gradient estimates that once nonrecurring, unsustainable "and cosmetic" benefits are removed - rather than reporting a profit of $11.3 million, Tesla would've lost $91 million. And that doesn't include a more conservative warranty accrual. The good news, that's better than the $464 million it lost a year earlier - but not "profitable."
Elon Musk and Tesla must be taken seriously by shorts, but the recent near-tripling of the stock price seems to be a great opportunity to cash in on what might be a fleeting short-squeeze and short-term top in the stock. Even if the company continues to succeed, valuation matters, and it appears to be way too high at this time. For me personally, this stock is too risky to own and too risky to short.
Here are some key points for TSLA:
Current share price: $91.50
The 52-week range is $25.52 to $97.12
Earnings estimates for 2013: 5 cents per share
Earnings estimates for 2014: $1.08 per share
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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