Tesla Motors (NASDAQ:TSLA) is a young US electric car manufacturer. Its only real product at this time is the Model S, which appears to be a good to excellent electric car. It is not only clean. It is sporty; and it has a relatively long range at up to 300 miles. However, the company is far overvalued. It still has no PE; and its FPE is 98.44, which is really just speculation at this point. Since you can't reasonably compare it on a PE basis with other automakers, the table below compares it on a Price/Sales basis and a Price/Book basis with some other major automakers as of the close on December 13, 2013.
TSLA Premium Multiple To
TSLA Premium Multiple To
General Motors (NYSE:GM)
Bayerische Motoren Werke (BMW.DE)
Volkswagen AG (OTCQX:VLKAY)
Daimler AG (OTCPK:DDAIF)
Toyota Motors Corp. (NYSE:TM)
Honda Motors (NYSE:HMC)
Nissan Motor Co. (OTCPK:NSANY)
Average TSLA Multiple Premium
Average TSLA Multiple Premium Without Fiat
The idea that TSLA deserves to trade at a premium multiple of 20+ fold in Price/Sales and Price/Book is ridiculous. Many of these companies have EV and/or Hybrid vehicles too. Many of these companies have much higher EV and /or Hybrid sales than TSLA. If you divide TSLA's stock price ($147.65 at the close on December 13, 2013) by 20, you get $7.35 per share. Even if you give it an already outrageous 10-fold premium to the average of the above listed automakers, you only get a stock price of $73.50 per share.
The following table contains links to the above automakers' EV and Hybrid offerings for 2014 for readers' convenience. There are many new EV and Hybrid cars.
Number of EV and Hybrid Offerings
Link to EV and Hybrid Offerings
5 (+8 EcoBoost)
I am sure there are many others. However, I hope the links in the above table will give readers some idea of the amount of competition that TSLA is going to have to face in 2014; and that competition should only get stiffer as the major automakers more fully enter the Hybrid and EV markets. The days of the Toyota Prius being the only hybrid available are long gone.
There are a few other problems with Tesla Motors' plans. It keeps touting its supercharging stations; and it is indeed slowly building these in the US, Europe, and probably other areas. However, on the Tesla Motors web site, I count only 43 currently in existence in the US. Even if you double or triple that for a few years, you will still get nowhere near the approximately 121,000 gasoline service stations in the US; and no rational person would think that Tesla Motors intends to build even one tenth of this number. Yet to take the amount of business from other automakers that some are forecasting, it might have to.
Some individuals may put up with the inconvenience of only a few supercharging stations, but as the number of TSLA autos on the road increases, there will be longer and longer waits at specific supercharging stations and at specific times. Plus there will be an increasing demand that the supercharging stations should exist everywhere. Building any large number of supercharging stations would cost Tesla Motors a lot of money. Currently they are not charging customers for this. That will likely have to change in the future; and when it does customers will not be happy.
Remember Hybrid cars do not have a battery mileage limit. They can run efficiently on gas if they have to. Yet EV only autos are only roughly twice as efficient in energy terms as Hybrids. Some other form of energy such as natural gas, coal, solar, or nuclear is ultimately used to create the electricity that EVs run on. There is no free lunch.
Elon Musk has said or implied that he intends to sell a great number of his EV vehicles in the EU; and he has touted sales there. However, his rhetoric has hidden many hard cold facts from the public. The Tesla Model S has sold well in a few EU countries that are giving buyers huge incentives, such as Norway and The Netherlands.
In Denmark, EVs under 2,000kg are exempt from the new car registration tax. The registration tax is set at 105% if the vehicle price is less than $13,250 and 180% when it is above that figure. The Danish government also grants free parking in downtown Copenhagen for EVs. For businessmen who have to park there, this could be a big plus. Yet Tesla Model S sales in Denmark are still low at 85 in the first two months of sales.
In the Netherlands EVs get exemptions from road and registration taxes. These amount to savings of 5,324 euros over four years for private owners; and they represent 19,000 euros in savings for corporate owners over five years. Tesla Model S sales were moderately good in The Netherlands at 348 in the first two months of sales.
In Norway EVs are exempt from all non-recurring vehicle fees, including sales tax. They are exempt from the annual road tax, all public parking fees, toll payments; and they can use the bus lanes. The free parking alone in Norway is estimated to be worth $5000 per year. The annual benefit of owning an EV in Oslo is estimated to be $8,200 per year. At this rate a Tesla Model S would approximately pay for itself in 10 years. That is a real incentive. Understandably Model S sales were 801 in the first two months there.
A big problem is that many of these incentives are introductory offers. Most credit card holders know what that means. They are being given incentives to encourage the use of EVs in the respective countries; and the incentives may not survive for very long. For instance the incentives in Norway are only in effect until 2018 or until 50,000 EVs have been bought (and registered). In other words Tesla Motors could see a huge drop off in sales in some of its biggest markets at just the time it is making huge production ramp ups (2017-2020).
To give a better near-term picture, the International Business Times reported that Tesla's sales in Norway were 801 vehicles in the first two months of availability. Another 348 were sold in Holland. However, only 98 were sold in Germany; and many other countries had few sales. I mention Germany specifically because it is an economic power; and if Tesla's Model S can't sell there, it probably will not be able to sell in high numbers in other EU markets consistently or long term. You can also be sure that lack of sales in Germany was not a supply issue, especially when Elon Musk, soon after the poor German sales figures came out, announced a new, specially modified Model S for the German autobahns. I don't think this will entice many Germans, especially when they can get a BMW i3 for about half the price of a Model S. Further let's not forget that Volkswagen, Porsche (especially the 918 Spyder Hybrid which hits 62 mph in 2.6 seconds), Audi, and Daimler all produce interesting Hybrids and/or EVs. Ford, GM, Toyota, Honda, Nissan, etc. sell in Germany too. In fact the Nissan Leaf outsold the Tesla Model S in Germany over the first two months of Model S sales; and the Smart ED sold 146 units in Germany in September 2013 alone.
You also have to take into account that gasoline is much more expensive in the EU countries than it is in the US. For example, recent gasoline prices in Germany have been over $8 per gallon. Some might think this would mean all Germans would want to go out and buy EVs. Instead what it means is that most Europeans are in the habit of traveling very little, except on business or on vacation. This means the shorter range of a Nissan Leaf is not an issue for most Europeans. For those for whom it is an issue, a Hybrid may seem a more logical alternative.
The Tesla Model S was supposed to be technically perfect; but this has been proven false. The first fire that Musk described as a fluke has been quickly followed by two more. None of these make the Model S a firetrap, but the NHTSA (National Highway Traffic Safety Administration) is still investigating this; and at the very least these fires have made Tesla's Model S look no safer than gasoline powered cars (public perception). To date there is not enough data to make a good comparison. There are relatively few Model S's on the road compared to say the BMW 3 series, etc. Plus people tend to drive their new cars more carefully than older cars. We'll have to wait on further data.
Tesla Motors has to date issued no recall on this problem. However, it did in June 2013 issue a partial recall for its Model S sedans due to unsafe back seats. In addition a failure in a low pressure aluminum casting press injured three workers at Tesla's Fremont, CA plant. This smudged Tesla's name and/or safety record a bit more. The claims of the Model S being a problem-less car are far overblown. It is sure to develop more problems as time goes on and as its parts age and wear.
On top of these problems, even Elon Musk has said that Tesla Model S production has been Lithium-ion battery constrained. He recently signed a new contract with Panasonic (OTCPK:PCRFY) for more than three times as many batteries in forward years; but even this will likely not fully meet Tesla's production ramp up plans. In fact Elon Musk has mentioned the possibility that Tesla might have to build its own battery factory to ensure supply. Other suppliers have so far shown little interest in building such a mega-factory themselves. They are aware of the risk that technology brings with it.
When cell phones first came out they used NiMH batteries. Now they use Lithium-ion batteries. Many expect there will be further improvements over time. If Tesla builds its own Lithium-ion battery factory, that factory may be obsolete by the time it is completed. Then Tesla would be out the entire cost, which would be huge. If Tesla does not build its own factory, it is unclear that it will be able to get enough lithium-ion batteries to produce the number of autos in the current forecasts.
Another complication is that the Tesla electric car may become a brick if the battery is allowed to fully discharge. The car cannot be started, nor can it be pushed down the street. Apparently the only solution then is to have the factory replace the battery at a huge cost to the customer.
With a 100% charge, a Tesla could take 11 weeks with no charging to become a "brick". If it is driven to near its maximum range, it could become a "brick" in one week if left at an airport. There are problems with this car that too many know nothing about. Apparently all Tesla cars emit audible warnings if the State of Charge falls below 5%; but if you have flown away from an airport, you are unlikely to be there to hear such warnings. This problem is apparently not covered by the warranty; and the batteries will have to be completely replaced at the owner's expense if the "brick" problem occurs.
A further problem that relates to this is that the Tesla Model S is said to be a "vampire". It burns electrical energy when it is not plugged in. According to one customer, who did an "unplugged test", the Model S discharges at a rate of about 1 mile of range lost per hour of inactivity. Hence if you left your car idle and unplugged for three days, it would lose about 72 miles of range. If you used much of the range getting to a hiking trail for a 3-day weekend, you might find yourself with a brick by the time you got back from your hiking/camping trip. To me this means the Model S is really only suitable for urban use. It further tells me that you have to figure the costs of the vampire discharge into your ultimate fuel costs for the Model S. If you leave the car idle a lot of the time, the Model S may not be for you. If you leave it plugged in and idle, it is sucking extra energy at this same rate, even if it is not discharging. Musk has promised a new "sleep" mode to address this problem. That is supposed to cut the discharge to a mere 0.2% per day. Most people could probably live with that, but it isn't here yet.
Still more people have complained about the range indicator showing faulty data. Apparently in the 4.2 software version, the software does not differentiate between whether the battery is warm or cold. If it is cold, the range indicator can show substantially lower range than when the battery is warm. One customer found this difference could be as much as approximately 20% of the range. This could upset more than a few customers, although many probably routinely leave their Model S's plugged in all night. In that case they probably don't worry overly much about the charge level. No doubt the above customer is an engineer himself.
Once you consider the above problems, you have to wonder how Tesla's battery warranty expenses will fare over the long term. It would seem there could be significant monetary problems for Tesla in this area. In addition, Tesla sells a large number of its Model S cars as leases (30% in Q2 2013). Tesla counts the whole cost of the car as revenue in its current accounting, even though it has guaranteed to pay the bank roughly $46,000 on a $90,000 Model S to buy the car back after three years. Under GAAP the $46,000 Tesla owes the bank is supposed to be accounted as debt. If for some reason Tesla cannot realize at least $46,000 per car when it resells these cars, it will incur losses. It is currently giving the public a false impression of its actual income (revenues). If the lease program increases to a greater percentage of sales, this may be an even bigger problem.
Investors need to also consider that Tesla has over 25 million stock options outstanding, of which roughly 40% are currently available for exercise. All have strike prices of less than $36.01 per share, and some options are for under $1.00 per share. There are currently about 122.59 million shares outstanding. The 25 million outstanding options represent approximately a 20% dilution of the stock. When you think about how overvalued TSLA stock is, consider that it is really an extra 20% overvalued.
I could go on, but I am sure I have been too verbose for most readers already. TSLA is a SELL at it current price. For people who want to short it, you can thank Morgan Stanley (NYSE:MS) and the HFT/momentum traders for pushing it up for you again. Further, keep in mind that even Morgan Stanley only gave TSLA a price target of $103 per share, which is far below TSLA's close on December 13, 2013 of $147.65 per share.
You should still be aware that the HFT/momentum traders can short squeeze the stock, so be prepared to be short this one for a while. Investors are already 34.30% of the float short. However, the BMW i3 should arrive for sale in the US at the end of Q1 2014. The new Honda Accord Hybrid should be a popular vehicle. The many other new vehicles will draw interest too. If you are prepared to wait, TSLA stock seems almost guaranteed to go down. Even Elon Musk has called the stock overvalued.
The two year chart of TSLA provides some technical direction for this trade.
The slow stochastic sub chart shows that TSLA is at overbought levels. The main chart shows that TSLA has been in a strong uptrend. However, the 50-day SMA looks to be headed inexorably for a cross of the 200-day SMA in the near future. This is a sell sign. If the 50-day SMA crosses the 200-day SMA, that will be a bigger sell sign. I do not see fundamental catalysts that would push TSLA stock upward. To me that means that only propaganda of the type Morgan Stanley just released can push the stock upward much further. After the recent Q3 report, it seems unlikely that the overall investment community will be willing to accept everything the pumpers say at face value. It is also important to note an expert stock pricer, an NYU Business School professor, Dr. Aswath Damodaran, who is a disinterested party, has put a "fair market" price target of $67.12 per share on the stock. Merrill Lynch has put a $45 per share price target on the stock. Some knowledgeable people are being honest about the stock. Their honesty is bound to be catching eventually, especially after some of the sales numbers for all the new EV and Hybrid cars come out in 2014. Yes, there are still many high price targets for TSLA, but the reasoning for them is unsustainable in my opinion.
TSLA is just another HFT/momentum traders' highly pumped stock. The price has little connection to reality; and that will become obvious over time. It has short interest of 34.30% of the float (as of October 31, 2013); and the HFT traders and momentum traders have been taking full advantage of this to short squeeze the stock price higher. In fact I often think that some of the ratings that come out from hedge funds and even in this case from Morgan Stanley are deliberately inflated in order to give their HFT/momentum traders a helping hand moving the stock price up. The SEC should really not allow this kind of behavior. The company is not profitable, and it has many future hurdles and gotchas, as well as questionable accounting practices. TSLA is probably as near a certainty as a short over the longer term as short investors will ever see. The CAPS community agrees with this with a two star rating (a sell).
If you own the stock, it is probably a good idea to take profits, if for no other reason than the temporal nature of the European (and likely the US) subsidies. These seem bound to disappear at about the time that TSLA is going through its largest ramp up. Their disappearance seems destined to wreak havoc with TSLA's profit picture at that time; and that is the time when everyone is claiming TSLA will be making money hand over fist. OUCH!
NOTE: Some of the fundamental financial data above is from Yahoo Finance.
Good Luck Trading.