Seeking Alpha
Growth at reasonable price, long-term horizon, alternative energy, natural resources
Profile| Send Message| ()  

Yesterday Morgan Stanley (MS) introduced a brand new dance step, the Electric Crawfish, when it got in front of the thundering herd, downgraded shares of Tesla Motors (TSLA) from overweight to underweight and slashed its price target from $70 to $44.

The principal reason reported in a Silicon Alley Insider report on the downgrade included "a breathtaking level of innovation for the internal combustion engine that is ready or near-ready for market." In the understatement of the year, SAI noted "the whole industry just isn't ramping as quickly as expected."

With all due respect, a phrase that's inevitably followed by a very disrespectful thought, the industry isn't ramping at all – it's already gone flat line. The following graph of monthly HEV and Plug-in Vehicle sales as a percentage of total US new car sales was derived from data published by and is worth at least a thousand words.

At yesterday's closing price of $30.89 per share, Tesla's market capitalization of $3.2 billion is an eye-watering 11 times book value and 16 times trailing twelve-month sales. That valuation is simply not sustainable.

In a recent 450 page black book report titled, Global Autos: Don't Believe the Hype" Bernstein Research and Ricardo plc reached the surprising conclusion that:

Hybrids will become viable on a large scale by 2020. We believe that near-term mass adoption of electric vehicles looks unlikely given the tough comparison with (ever improving) combustion engine vehicles. Premium-priced plug-in hybrids may become viable earlier, but by definition will be niche.

When I consider the market ramp for electric vehicles over the last 11 months and compare it with recent news that Exide Technologies (XIDE) has produced and shipped a cumulative total of 2.5 million batteries for cars equipped with stop-start systems, I'm more convinced than ever that the market prices for Exide and Tesla will cross each other at some point in the next twelve months.

Source: Morgan Stanley's New Dance Step: The Electric Crawfish