I like Tesla for many reasons. Their ambitions, their prospects for the future and now their actual success. I love their plans for a free electric charging network and their planned sales model!
But one thing makes me not like Tesla, their valuation. (you heard it before)
Tesla is a tiny car company. Yes, they have huge potential! But 20.000 cars in 2013 for example would dictate that even with huge success until 2020, they will still not be able to produce and/or sell more than 150.000 - 250.000 cars per year by then. Compare that to Audi, BMW and Daimler who have sales of more than 1 million cars a year today and growing. Also consider that those two premium carmakers are small compare with the mass producers like Toyota, Volkswagen, GM and Ford. Will Tesla try to compete in the premium car segment or will they move down? In any case they will face hard competition.
In one year, the market capitalization of Tesla Motors have jumped from 3 billion dollar to almost 9 billion dollars after the stock price explosion after the first profit announcement. A "sustainable" current value of 7-8 billion dollars in the market the next months is more than 1/10th of the market capitalization of Daimler and BMW. Daimler in addition to luxury cars also make trucks, buses and other products. Let us assume the price of Tesla stays over 1/10th of the price of BMW and Daimler for the time being, which is quite likely unless there is a dramatic change in sentiment in the market.
Daimler and BMW each have market capitalization of around 45 billion euro (60 billion dollars) and both companies produce multi billion euro profits. It is not unlikely that either or both of those companies produce profits of 5 billion Euro a year some or all of the next years or roughly 7 billion dollars or even up to 10 billion dollars in a good year. Tesla's profit was 12 million dollars this quarter or if this continues could end up being 40 million dollars a year.
Furthermore both BMW and Daimler have dividends of more than 3%.
There is no saying when Tesla Motors will pay dividends, for now they are saying they will retain all profits for growth, and this will most likely continue for at least a decade. Development of new models and new technology is expensive, and even with huge success for Tesla Model S and Model X it is unlikely that Tesla will get anywhere near a P/E of lower than 20 even at today's market capitalization. It's possible but doubtful that Tesla will have a stable profit of more than 500 million a year by 2020. It's unlikely that any of that will go towards dividends. With no prospects of dividends and profits that have to quickly catch up with market capitalization for a fair valuation of the company, there is nothing that makes the current price tag attractive, not even the potential and future growth prospects until 2030.
Let's not even start to value Tesla the same way as BMW and Daimler as they would be in seriously bad territory. Daimler and BMW both trades at around 10 P/E, they have huge profits, big enough to outright buy Tesla even with today's crazy price tag. (As a purely theoretical exercise of course). BMW and Daimler both pay good dividends, both sell more than a million cars and is growing every year, now also a lot in China. China is a huge market for BMW and Daimler and a huge continued growth opportunity. Pricing Tesla at 1/8th of the price of BMW and Daimler is absurd, especially today. Perhaps by 2020 if we use the same pricing for Tesla and BMW, but much pricing in Tesla of course does take the future into account. But it does not take into account how serious competition Tesla will have by 2020 or 2025. It also does not take into consideration possible problems.
By 2020 or at least by 2025 it is almost guaranteed that both BMW and Daimler will have all electric premium cars competing with Tesla. Taken into consideration just how premium BMW and also Mercedes is, this competition is hard for Tesla. Tesla is nowhere near building premium cars of the same quality of BMW or Mercedes. It took Mercedes and BMW decades to get to where they are in terms of build quality. When they finally get the electronic car up and running, their engineers will certainly manage the same for those cars interior, exterior and driving experience. Tesla's only possible advantage here is innovation in electronic car technology, in particular in non-traditional and non-core functions.
Tesla will not only face a huge challenge from BMW and Daimler, they will also face other competitors who will roll out cheaper electronic cars. Another big challenges that Tesla might face is the US love for fossil fuels. There is now a revolution in technology for shale gas extraction and there will surely be the same for oil sands if history is a teacher. This and the fact that the anti-electric car lobby will claim that electric cars are not clean could become a major hindrance for Tesla in the US. The withdrawal of subsidies could pose another threat, and it is not farfetched considering the unstable and often hysterical political environment in the US.
If Tesla does everything right and none of the big hindrances plays out, by 2030 Tesla could be a big car company selling 500.000 or more electric cars every year. Then it is worth paying today's price for! If you live a bit in fantasy land, they could sell even more. Let's say Tesla becomes the new Ford for the electric age by 2050, then surely today's price tag is fair. Yes it is! But I don't take those things into account. Ford had no competition back when they did what they did. The difference between electric car and gasoline car is nowhere near as big as the difference between horse and car. It could become as big, but by then competitors will be all over the place unless there is a huge and dramatic change in car design overall that voids all the technology from gasoline powered cars. That is not going to happen, lot of gasoline car technology, but in particular design will still carry over from gasoline cars to electric cars. It isn't so that all competitors stand with no technology versus a finished technology from Tesla motors. And it certainly is not so that carmakers stand without cash, in particular the premium ones, they have lots of cash and lots of opportunity to move to the electric car market whenever they please.
Tesla can become many things but it could also end up becoming an Apple in the era of personal computers, a 1995 niche market or niche brand in a huge and growing market dominated by others. It is highly optimistic to pay for Tesla today, based on hopes 20-30 years into the future, it would be wiser to pay for Tesla today, based on possibilities 5-10 years into the future, and by that measure, Tesla at 8 billion dollar market capitalization for sure it not worth it, especially when considering BMW and Daimler as competitors or trying to evaluate Tesla against those two companies, in any way! Today I would buy BMW and Daimler as a safe bet, rather than gamble on Tesla. If the value of Daimler and BMW sharply rose and the value of Tesla sharply fell, then I could make a bet on Tesla. In any circumstance I would buy Tesla shares for less than $30 per share and I would today consider it for less than $35 per share. This has the last year moved up from surely buying at $25 and consider for less than $30 per share. This would be a fair risk versus reward for me as I am not putting money into stocks for gambling purposes. Tesla would then fit between some other stocks as a risk stock with high potential.
But I would rather place a safe growth stock like BMW or Daimler into my portfolio at today's valuation, especially knowing that I also get a dividend, knowing that I get growth in general, knowing that premium car market is safer in the market than other carmakers, knowing that these brands are growing fast in China and knowing that they will get into premium electronic cars in the future, or the same marketplace as Tesla.
Carmaker investments in 2013 is risky business. Who is to say things will not completely change, making all of these companies irrelevant in public transport by 2050. By then at least I will have my investment back and more with both BMW and Mercedes from dividend payments.
At the moment I am sitting on the fence when it comes to carmakers, but as the market is today I am far more likely to buy Daimler shares than Tesla shares, unless as I said the price of Tesla falls dramatically. Best brand is BWM, they are experiencing huge growth and massive success. Daimler have higher dividends and more potential to catch up with BMW, and they also sell huge trucks, buses and other products. Additionally BMW market capitalization is distorted due to the Deutsche Boerse definition of market value and the fact that half the company is owned by a German family.
In any case, Tesla today, with market capitalization of over 8 billion dollars is too expensive for me no matter how much faith I have in the company or how much I love and believe in their new concepts.
Ps. Yes I know, today's market doesn't take logic into account, so I could end up losing out on much money by not putting it into Tesla today. But so be it. I know one thing for sure, I would definitely not bet against Tesla.