Tesla's stock price reminds me of a horror story I once read called: "the dot-com bubble." It was a time when stock prices doubled in less than 6 months, and any news - good or bad - would drive up the stock further. I believe today we are seeing the same thing with Tesla Motors (NASDAQ:TSLA).
In the following paragraphs I will attempt to explain why Tesla is overvalued on every conceivable metric and not worth your money.
What everyone knows yet so few care about
Let us start off with some very relevant metrics before we dive any deeper.
- Tesla sports a price to book ratio of 84.53, while the average price to book for the S&P 500 is 2.48. Tesla's price to book ratio alone represents a 3308% premium to the market. At such a lofty valuation, you put more emphasis on the future than the present.
- Tesla paid 1310% of its gross profit in R&D and Selling General & Administrative costs (SG&A). Assuming operating expenses stay flat, Tesla would have to grow its gross profit by 1210% to break even. However, with a constant need to innovate in an inherently competitive industry, I expect Tesla to ramp up R&D spending in the coming quarters.
- Tesla has never had a profitable year since its inception and has only had a single profitable quarter of a measly 12 cents per share. Nevertheless, Tesla's stock has gone up 500% since its IPO. This begs the question, how can a company's stock be worth more, even though its underlying business is worth less?
- Tesla has a current ratio of 0.982 - implying that the company cannot pay its short-term obligations. In addition, Tesla is an illiquid company that turns over its inventory every 240 days. As a result, Tesla may not be able to meet its short-term liabilities as half of its "current assets" come from its inventory. However, cynical practices by management cover these liabilities with relative ease (discussed further in a separate section).
Shareholder Equity Is Wiped Out Almost Every Quarter
Tesla has consistently had a ROE of -100% and below. To put it in layman terms, it means that Tesla has wiped out shareholder equity almost every quarter.
So, how is Tesla not bankrupt by now? The culprit lies in Tesla's balance sheet and cash flow statements. This leads into my next section.
Tesla's Liquidity Problem
The following are Tesla's annual statements from the year 2009 to 2012.
Cash Flow from Financing Activities
(Source: Google Finance) All figures in millions
Tesla's cash flow from financing activities exceeds its annual revenue, and as stated above, Tesla regularly wipes out shareholder equity. As a result, Tesla has to find new financing to remain solvent.
One of Tesla's sneaky financing methods is to sell stock to the open market. Since Tesla sells at a high premium relative to equity, all Tesla needs to do is sell a small amount of stock to cover its equity loss - something it has been doing for years. Furthermore, as long as Tesla touts its future prospects, it can do this as many times as it wants. A cynical, yet ingenious use of its stock price to its advantage. However, Tesla cannot do this indefinitely, and the market will catch on and adjust the stock price accordingly.
Tesla's ability to raise capital out of thin air could be the reason why it has remained solvent in one of the most capital intensive businesses in the world.
(Source: Yahoo Finance) All figures in thousands
Note that Tesla's "capital surplus" has been growing every year as a result of these capital raising programs. Also note that the company has negative retained earnings in excess of $1 billion.
(Source: Google Finance) All figures in millions
Tesla has grown its debt by over 16,448% in just 4 years ($466.67 million in 2012 - $2.82 million in 2009 divided by $2.82 million original) outpacing the growth of its revenue, which only grew 269% in the same period ($413.26 million in 2012 - $111.94 million in 2009 divided by $111.94 million original).
Furthermore, Tesla has a negative debt-coverage ratio. This means that Tesla could have problems servicing its debt, and paying them down when due.
Investors' Irrational Exuberance
Similar to the dot-com bubble, Tesla has a following of investors that are overly optimistic and ignore anything that does not pertain to the bullish thesis. Irrational exuberance demonstrated by investors is always a warning sign of what is to happen next.
The following are conversations about Tesla in an online chat-room.
(Note: I left the people nameless for privacy reasons.)
"Anybody who is positioned short into earnings is living on another planet. This is the "IT" qt.r that gets the non-believers"
"onboard $TSLA"Did anybody else notice $TSLA closed at 12345?Next major milestone: 54321. "that's just too awsome. :)"
"The more people write about how $TSLA is overvalued the higher it trades. Covering shorts is the same as buying."
"If you're trading $TSLA based on fundamentals, you've got a tough row ahead."
"$TSLA just note that ANY poster who advocated shorting TSLA is one of world's worst traders"
"$TSLA going to be a scramble for indexers to get long, because those of us who know it's going to 400 are holding. Ignore all top callers"
Apparently it is a good idea to abandon good investing counsel and buy a company based off an arbitrary price target.
Tesla Is A Capital Intensive Business
Naturally, the automotive industry is a capital intensive business; thus, making it a risky investment in and of itself. In prosperous times, automotive companies thrive, and in recessions they die. That is the never ending cycle of an automotive company, and Tesla is certainly no exception.
- The stock doubled in less than 6 months from optimism
- Tesla's book value of 84 (based on its last earnings report) is a significant premium to the market average of 2.53
- High SG&A and R&D expenses
- Has only been profitable once since inception
- Shareholder equity is wiped out almost every quarter
- Cash flow from financing activities exceed annual revenue
- Cynical use of its overvalued share price to sell a relatively small amount of stock to cover equity loss
- Debt has grown by 16,448% in 4 years
- Tesla depends on continuous shareholder capital to cover shareholder equity loss - quite ironic
- Irrational exuberance demonstrated by investors
- Inherently capital intensive business
- Niche cars sell well only during "boom" periods
Clearly, Tesla does not deserve its present valuation. I have never seen a case where a company regularly wipes out shareholder equity and is still in business - it's unfathomable. I will remain skeptical until I see any tangible evidence of a "growth story."