It is very hard to not let emotions take over when we are talking about stocks like Tesla Motors (TSLA). There are those raging bulls who believe the stock is going to the moon and there are the hungry bears who believe the stock is just way too overvalued. Who is right? The short answer is no one knows exactly. But what we can do is put both the pros and cons side by side and evaluate which side we want to be on. This article is one such attempt.
The positives first:
Magical CEO: Elon Musk has some magical aura and charisma about him. So much that he has continuously drawn comparisons with the late great Steve Jobs. And there have even been calls for him to be the next Apple (AAPL) CEO so we can finally see the next generation's car. As we have seen with Amazon (AMZN), it does really help to have a CEO that investors and Wallstreet like, even if the bottom line is not showing much improvements.
- Upgrades are flying all over the place. The latest is from a Morgan Stanley analyst that Seeking Alpha has covered here. It's worth noting that less than one year ago, Morgan Stanley had a price target of just $47 for Tesla.
- According to Yahoo Finance, institutional investors hold 70% of the shares. Needless to say this is a positive for the time being, as the big boys are likely to prop up the stock on pullbacks. Note the word "for the time being" as we will talk about it in the negatives below.
- By now, almost everyone interested is aware of the huge expectations for Tesla's car sales. If that growth catalyst is not enough, the company is expected to announce the world's largest battery factory.
- To bring some numbers into context, earnings are expected to grow at 52% per year over the next 5 years.
- EPS estimates are continuously being revised up as shown in the second table below.
- And the bulls could in fact argue that Tesla's run up is backed up by the earnings surprise that is shown in the first table below. Some of the "earnings beat" have been enormous.
(Source: Yahoo Finance)
Onto the negatives now:
Fundamentals: Let us get the obvious out of the way first. The numbers just do not add up when it comes to Tesla's valuation.
- A market cap of $30 Billion is almost half those of Ford Motor (F) and General Motors (GM).
- But there are no earnings currently and even looking at forward earnings gives it a multiple of 132. Of course that is not to say that the stock cannot go up further, as we have seen stocks like Amazon hold onto lofty valuations even though the bottom line was going the other way.
- Even the company's CEO admitted last year that the then market cap of $22 Billion was excessive. What about the current $30 Billion then?
This is the "cause" for the "effect" covered in the Fundamentals section above.
- It is hard to recall the last large cap company that attracted so many different categories of people alike in such a short span: investors, analysts, and even casual readers.
- Words like Tesla is "supercharged", and claims that "Tesla is going to $1000" should make long term investors worry.
- Analysts are upgrading and increasing price targets based on their assumptions and expectations about Tesla disrupting other industries. For now, this is a positive but retail investors will never know when the rug is pulled out until after effects.
- The stock has gained 500% in the last 12 months and almost 100% in the last 3 months.
- If those numbers don't make you think about where you are in this "group", how about this one. On Seeking Alpha, the number of followers for Tesla has gone up from about 900 in April 2012 to 45, 256 as of this writing. Perhaps the easy money has been made by the early ones ?
- There is no doubt that the Electric Vehicles [EV] market is still in its toddler years, if not infancy. Nissan Motor (OTCPK:NSANY) and Toyota Motor (TM) are some of the well known rivals in the EV market for Tesla.
- But given how much fire (no pun intended) there is in this segment, the bigger names are also piling in. BMW, Audi, and Cadillac are coming for the luxury brands plug-in and EV.
- Tesla obviously enjoys the most coverage and recognition for now but when you start competing with so many big companies that have much deeper pockets, things are bound to get tougher. It might turn out to be a situation where Tesla's share of the pie shrinks but the pie itself could get bigger.
Extrapolation #1: We all, as investors, love using projections and extrapolations. The table below shows that for Tesla's valuation (at current price) to match the market average, the company must compound its earnings at 50% each year for the next 6 years. It looks highly likely that investors will be paying a premium for the foreseeable future. Even this 6 years time frame is extremely optimistic as:
- Growth efforts tend to shrink earnings due to all capital expenses. And the investment thesis for Tesla is growth.
- Share price is likely to keep going up due to earnings matching/exceeding the expectations. While this might sound like a positive in the short term, the "price" paid for tomorrow's "value" keeps going up.
(Source: 2014 estimates and current share price from Yahoo Finance)
Extrapolation #2: EPS is not the only thing Tesla needs to grow at 50% to make sense of the lofty targets and valuation. This morning's report from Morgan Stanley suggests that Tesla will be selling 370,000 cars per year by 2020. And for this to happen, Tesla must sell 50% more units each year, as it sold 22,400 units in 2013.
Conclusion: So there you have some of the pros and cons for those looking at Tesla as a possible investment or trade. While some of the points might seem obvious, it helps to look into the details of the so-called "known factors" and to put both sides of the argument on par and evaluate which side you want to take.
In case you are wondering, there is also a third side, staying away. Shorting is way too risky with all the momentum the stock has got. The fundamentals and the recent run up make the risk/reward less attractive for the long side as well. Short term trading might be of interest to some and the 50 day and 200 day averages were both around $170, before the monstrous run the last two days.
Everyone has heard of "counting the chickens before they hatch". In case of Tesla, the crowd seems to be counting the number of farms to own when the first chick is pregnant.