Tesla is one of those divisive stocks that has you on either end of the isle. Both sides really don't listen to each other and both think they are 100% right. I am here to tell you I don't think I am 100% right but that my opinion on Tesla is a forever changing story that suites the current economic conditions.
Lets look at the company
Tesla is by far one of the best automotive companies out there. They continue to beat wall street estimates and they make one of the coolest cars out in the market today. Listening in on the conference call one thing struck me is that they are not making enough cars to saturate demand. Elon Musk was even saying that he can't take on too many orders for fear that they can't be filled in time. As for the model x he says that he has a lot of interest in the car even though they have done no advertising for it and that Tesla stores push people to buy the model S instead. So no wonder the company beat estimates on Thursday, they have a loyal and growing consumer base that will likely grow in the future.
Although Tesla is a fantastic company with good future prospects here you would normally see a recommendation to buy the stock but I can't do that. Tesla has departed so far from the fundamentals that anything but perfection will be considered a failure and even perfection won't make you any money. Lets look at the numbers.
TSLA has a market cap of 30 Billion dollars to put that into perspective the market cap of GM is 54 Billion, Ford is 67 Billion and Toyota is 186 Billion. The ttm net income respectively is TSLA: -135.06M, GM : 1.92B, F: 6.61B, TM: 17.85B. The ttm profit margin respectively is TSLA: -6.52%, GM: 2.08%, F: 4.51%, TM: 7.10%. Notice this is sub 10% this is due to the competitive nature of the auto business. Since the automotive industry is debt intensive I think it is fair to value these companies on an EV/EBITDA basis, this way as debt grows the ratio will become larger. The EV/EBITDA respectively TSLA: 832.25, GM: 7.08, F: 13.22, TM: 9.09. If you want to see how much Tesla needs to grow EBITDA to become fairly valued just divided 832.25 by the multiple. Tesla EBITDA is at 33 million grow that 100 times you get an EBITDA of 3.3 billion and you get an EV/EBITDA = 8.3 without taking into account the debt to get there. That would be 1/3 the EBITDA of GM which is a very ambitious outcome. Even if you believe that stellar Tesla management can pull it off that means Tesla is fairly valued today which gives you 0% margin of safety.
The bull argument, price doesn't lie
Tesla has soared since its IPO. The argument from the bulls is that since Tesla has gone up in the past that Tesla should go up in the future. I don't think this will happen, I think that Tesla will soar to new highs until people realize that it is not capable of 20% margins and aggressive growth but it is limited by the competitive and low margin nature of the automotive business. Then you will get a significant correction maybe making an opportunity for deep value.
Why is the price so high then if it isn't correct?
Tesla is a cool company. They make cool looking cars and are a revolutionary new company and as a result people have put their money in the stock with little research. Tesla's CEO Elon Musk is considered by many as the real life Ironman. As an engineering undergraduate I adore the way he views the world and his vision of the future. Many of my classmates look up to him as well and some have even invested in Tesla. In fact I would say most people in my engineering classes know a guy who knows a guy who has invested in Tesla without any knowledge of investing, and that's what bothers me about this stock. In short, you have a lot of people who believe this is the next great thing and they don't necessarily care about the price.
I hope Tesla succeeds in its underlying mission in getting EVs on the road. Tesla has a good shot at becoming profitable and successful despite the challenges they face. Even if Tesla does become profitable the price at which the stock is trading at is too high for what they can feasibly accomplish. Therefore I don't recommend the stock, I suggest buying the car while reducing your carbon footprint as the best way to help Elon.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.