Investors Are Buying A Pig In A Poke With Tesla Motors

 |  About: Tesla Motors (TSLA)
by: David White

The term, "a pig in a poke", refers to buyers buying a pig in a bag without inspecting it closely. In this way they are deceived into buying low quality meat or even sour meat. This is what investors are doing with Tesla Motors Inc. (NASDAQ:TSLA). Investors are told this is the hottest new car company ever. They are told it produces the only great electric sports car; and it does produce a good car by all reports. They are told the CEO Elon Musk is a genius; and he is. In this sense they have been truthfully told they are buying a pig in the bag they are buying.

Still as investors they are buying much more than whether or not TSLA makes a good sports car ("a pig"). They are buying the likelihood of good profits in the future. They are buying the prospects of great growth for an untold number of years into the future. Most Tesla investors will never own a Tesla car. They just want to own the hottest new growth opportunity. Some of them also want to be green and chic. They want to be in the "in crowd" as TSLA stock owners. This may be trendy, but it is a terrible way to decide about a stock. It is instead a good way to buy a "pig in a poke" (or bad meat that is indeed still a pig so you can't get your money back), especially when you are getting in at what is likely the end of the run (or close).

How is Tesla Motors a "pig in a poke"? The first and perhaps the most important way is that it is hugely overvalued. It has yet to make any money, although the prospects of that have been improving. It lost approximately -$30.5 million in Q2 2013 (or -$0.26 per diluted common share) using GAAP; yet the stock surged on the better than expected production numbers and consequent revenue numbers. Again admittedly Tesla beat on its adjusted earnings numbers with a +$0.05 per share profit versus an expected -$0.17 per share loss. The real problem with this is that Tesla has no really good reasons for such adjustments. They are just so much hand waving. This accounting obfuscation's sole purpose is to make Tesla Motors look like a better company than it is. Further the non-GAAP (adjusted earnings) of +$0.05 per common share were lower than the +$0.12 per common share in non-GAAP earnings in Q1 2013. That is not growth by any standard. Plus it was achieved with much better than expected production and sales results.

The company claims that much of the difference between its GAAP numbers and its non-GAAP numbers is due to lease accounting. However, this is just another way of saying that it is not allowed to account income until it has actually earned it under GAAP. If it hasn't earned the income, it hasn't made the profit. No one knows for sure what the outcomes of the various lease contracts will be, especially if the U.S. sees a second recession in 2014 or 2015. Many think this is a strong possibility. Dr. Faber is again calling for a complete market rout. Others are pointing to the all time high in margin interest. In the past this has signaled that an approximate 50% retracement of the overall market will occur in the next one to two years. In this light Tesla's non-GAAP accounting without lease accounting is not only misleading (TSLA made $0.20 per common share this way), it has the potential to almost completely wipe out your investment. The claimed lease profits could turn into huge losses.

When I say TSLA is a pig in a poke, this statement is partially based on its huge overvaluation relative to other auto companies. Since TSLA is not currently making money, I will not bother comparing P/E ratios. I will compare TSLA to other major car companies using two common comparison metrics: the price/sales ratio and the price/book ratio (see table below).


Price/Sales Ratio

TSLA's Premium to other stock's P/S

Price/Book Ratio

TSLA's premium to other stock's P/B

Telsa Motors



Ford (NYSE:F)





General Motors (NYSE:GM)















Click to enlarge

If you argue that Tesla Motors will eventually become a premium auto maker such as BMW, the above table shows clearly the big flaw in that argument. TSLA is trading at a 20.9x premium on Price/Sales and an 18.6x premium on Price/Book to BMW -- a premium automaker. In other words you would be arguing that a far overvalued TSLA may eventually be as big and successful a premium auto company as BMW. This argument falls flat when such speculative rhetoric insists that you pay a roughly 20x premium for TSLA over BMW, which does actually produce good profits.

Further BMW has a large dealer network. It provides easy access to expert service departments for customers around the world. By comparison TSLA, has only stores, which are not true dealerships; and it provides few service departments. In fact it is trying to bypass dealerships altogether with direct to customer marketing. One big problem with this has been that 48 states require dealerships by law. TSLA is trying to get this law overturned; but these are state and local laws. It is unlikely TSLA will be able to make significant headway in ridding the U.S. states and localities of such laws. This is a huge sales problem for TSLA. After the car has been in use for five years plus, the service issue likely will become a highly visible problem too. In other words, TSLA is facing more headwinds than just making more good cars more cheaply.

Admittedly many think TSLA makes a good premium car. However, with limited ability to sell such a car in most states, TSLA is fighting severe headwinds if it expects to grow its sales significantly. It has less than fifty of its own stores, which other dealerships are in some cases suing to close or severely restrict. It has less than fifty service centers; and it has none in many states. In California, virtually all nine (one is in San Diego) of the listed service centers are in either the SF Bay Area or the greater Los Angeles Area (including Orange County). You probably don't want to own a TSLA car if you do not live in one of these two places.

On top of all of this the competition in the EV (electric vehicle) arena is increasing. The new important entries in the U.S. are the BMW i3 and BMW i8. The i3 will go on sale in the U.S. in Q2 2014. The date for the i8 is sketchier, but it too is coming soon. There is also the GM Volt, which in 2012 was the best selling EV in the U.S. with a starting price of $39,145. Ford's 2014 Focus EV will start at $35,200. There is the Toyota (NYSE:TM) Prius, which is the former king of the EV world. There is the Nissan Leaf, which is another electric only vehicle. There is the Honda (NYSE:HMC) fit EV. Essentially all of these vehicles sell for substantially less than the Tesla Motors Model S, which ranges in price from about $70,000 to easily more than $110,000. In other words most of the other vehicles sell for roughly one half of the Tesla Model S' price. Of course there is also the BMW i8, which will be a performance hybrid sedan that is expected to more than compete with the Tesla Model S performance-wise. It is slated for launch in 2014; and it is even more pricey than the Tesla Model S at $139,000 to $208,000. It is higher priced than the Model S, but it is also higher performance.

The chart below showing customers recent purchasing patterns for EV vehicles should be of interest to many investors.

On this chart the Model S seems to be losing out to other competitors in over the last few months.

The big advantage of the TSLA Model S over most of the above cars is that it has an approximate 200 mile range -- all on electric power. Further at fast charging stations (of which there are currently few in the US), it can recharge for another 200 miles in only 30 minutes. Most of the electric only cars listed above have only an approximate 100 mile range. Some can also recharge quickly though with the right equipment. Plus many are really combo cars (or can be). This extends their range significantly. The BMW i8 with the Eco Pro engaged can achieve a range of about 600 km (about 373 miles). Few people want to drive more than that in a day.

The i8 may not be an electric only car, but it gets an average of 94 mpg (or 100 km per 2.5 liters). This is more than enough to make almost all drivers think they are "green". It has sexy, wing like doors. It does 0 to 100 kilometers per hour (62+ mph)in 4.5 seconds. It has a combined output of 362 hp with 420 lb-ft torque ability. Its top speed is limited electronically to 250 km per hour (about 155 mph). This is more than enough speed for today's congested roadways. Plus I am sure that the truly imaginative will be able to defeat that limit if they really want to. The i8 by all accounts is the performance car that every kid dreams of; and the Tesla Motors Model S seems staid by comparison. Yes, the BMW i8 costs more; but for the Bay Area and greater Los Angeles Area elite, the price will not be a big deterrent. This car is fun to drive; and it has a lot of good electronics backing up its performance.

In sum the Tesla Model S is industry beating (except on price) until the BMW i8 hit's the market. Then that is the car more of the environmentally conscious rich and well-to-do will want. The BMW i8 will pressure sales of the Model S as soon as it comes out. It is the car every kid dreams of. It has a greater "wow" factor than the Model S. The growing performance of the lower end vehicles, at roughly half the cost of the Model S, should provide a lot of lower end competition too. Many people do not need a top line sport car. They would be happy with the 7.2 second 0 to 60 mph performance of the i3. Many go on few long trips. Sometimes these are so few that they could rent a car for these relatively cheaply.

Further with an optional small gas powered generator range extender the i3 will go approximately 200 miles without a charge (or about equal the Model S' range). It doesn't look quite as good as the Model S; but it has the BMW reputation and service abilities behind it. Plus even with the range extender, it costs far less than the Model S. In other words, the truly rich will choose the i8, and many of the purely "green" will choose the i3 (or one of the many other cheaper EVs). The Model S will get hurt by this. There will be pressure on pricing.

Tesla Motors, which is not yet making money, does not have a clear path to growth and prosperity. Big competition is coming in 2014 from BMW; and all of the other EVs are only going to get better and more competitive. Don't forget they all have big companies behind them. They may be lagging the Model S in technology at the moment, but unless Tesla can keep making quantum leaps forward, they will all catch up to Tesla over the longer term. Investors are buying a "pig in a poke" with TSLA. TSLA is a sell at its currently outrageous stock price.

The two year chart of TSLA provides some technical direction for this trade.

Click to enlarge
(Click to enlarge)

The slow stochastic sub chart shows that TSLA is still near overbought levels. The main chart shows that TSLA is roughly 133% above its 200-day SMA. Technically this is a situation which does not historically last long without a correction, no matter what the stock is. In TSLA's case, huge competition from BMW is coming in 2014. Fundamentally and technically TSLA should correct significantly. Even momentum trader pundits are citing a pullback to $133.

More fundamental pundits are suggesting a pullback to $100 as a good support area. We probably won't see worse weakness until the debut in the U.S. of the i3 in Q2 2013. When the i8 comes out later, you should see real weakness. By then TSLA will be making more cars. When many of the rich drop the Model S in favor of the BMW i8, the company's growth metrics will be really hurt. I think you beat the crowd on this one. The HFT/momentum/hedge fund pumpers may make TSLA go higher this year (or not); but the risk reward is no longer there at the current price. It is a sell. Take your profits. Some aggressive traders may wish to short it. It is currently coming down off its earnings beat short squeeze; and it was far overvalued before that short squeeze.

Note: Some of the fundamental financial information above is from Yahoo Finance.

Good Luck Trading

Disclosure: I am short TSLA. 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.