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Valuation Of Tesla Is Not Rocket Science

Jul. 20, 2013 1:34 PM ETTSLA2 Comments
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Tesla Motors (TSLA) produces some of the finest luxury automobiles in the world. This is a fact because they have received the 2013 Motor Trend Magazine car of the year award. Tesla blends industry leading luxury with industry leading innovation. Those two facts are indisputable. Investors and analysts without bias towards the company will not dispute either one. With that said why is valuation for Tesla such an issue? Most of the disagreement in regards to Tesla's value seems to be between investors. Bulls argue that Tesla is undervalued, even at current prices, because it has "something special". Essentially, what that means is they perceive Tesla to be undervalued because of human emotion. Bears argue that Tesla is overvalued. In their minds it can't be worth more than another luxury auto manufacture with similar sales and gross profit margins. Basically, the bear argument is that Tesla is overvalued because of human emotion.


First of all, it should be clear by now that Tesla Motors manufactures automobiles. It manufactures tangible products and cannot be compared to websites like Netflix (NFLX) or Priceline (PCLN) due to the simple fact it is not a website. Wishing for Tesla to be a website and trade like a website ( trade at 200 times foreword earnings) will not make it so. Instead it is comparable to a company like BMW (BMW.BE) or Daimler AG (DAI) (Mercedez-Benz). Tesla, BMW and Daimler earn profit from the sale of automobiles, which means the stock price is relevant to revenue minus operating expenses, otherwise known as net income. Exemption from this rule is not granted simply because everyone loves the product or the CEO. As of today, Tesla is not profitable without the sale of zero emission vehicle credits (ZEV). I seriously doubt if there is a professional analyst, fund manager, or even experienced investor that doubts Tesla will report a loss in Q2 13. With that said I seriously doubt there is any investment professional who would doubt Tesla become profitable in the future, but to follow the "Tesla's worth $120.00 now and they don't even earn a profit… imagine how much they'll be worth when they are profitable" logic is emotional and its erroneous.

The Analysts Behind the Estimates

Diligent investors know that the low price target for Tesla is 39 dollars per share. That estimated price target was estimated by a team from Bank of America (BAC), led by John Murphy. Who is this man and does his estimate carry any weight? John Murphy has over 40 years experience. He is widely considered the father of inter-market technical analysis. He has authored numberous books including: "Technical Analysis of the Futures Markets" and his book "Intermarket Analysis: Profiting from Global Market Relationships" is the basis for the Market Technicians Association Chartered Market Technician Level 3 exam. If John Murphy warns investors to "be skeptical" then investors should "be skeptical."

The high price target of 200 dollars per share was performed by Andrea James of Dougherty & Co. From 2006 to 2009 Andrea worked as a Financial Journalist. Her work was published in the Washington Post, Houston Chronicle, San Francisco Chronicle and Washington Business Journal. At present Andrea is the Sr. Research Analyst at Dougherty & Co. Her area of expertise is in aerospace and defense, clean tech, industrial and automotive. Andrea describes herself as a "journalist thrill seeker turned stock market analyst"-Twitter.com

What's the Point?

Why wouldn't Tesla be "exempt from the rules?" The stock could be worth 200 dollars right? Wrong… although emotional investors can pay whatever they desire for Tesla they are not the ones who decide how much it's worth. Like I said before it's not rocket science so don't over think this. Money isn't managed based off a gut feeling or because there's something special about a particular company. Its managed based off how much a stock is actually worth. In other words its managed mathematically. Does Tesla earn enough money to mathematically be worth 120 dollars per share and how much are the institutional investors willing to pay for Tesla? No… and they've already told you. They're willing to pay between 39 and 90 dollars per share so that's what its worth. Since they own a majority of the shares they decide when to sell them. If a majority of the professional fund managers perceive Tesla to be overvalued it is overvalued and it sells off; their perception is reality. What anyone else thinks is irrelevant. To argue that an investment bank or hedge fund wouldn't perceive Tesla to be overvalued would be no different than to argue 1+2=12 or maybe even 21 because the numbers 1 and 2 have sentimental or extra value so adding them couldn't possibly equal 3. Money Tesla earns is not different from money BMW or Daimler AG earn. Since analyst opinion ranges from 39 dollars all the way up to 90 dollars then the 90 dollar estimates would include future sales of the model s and model x to account for rapid growth. While the 39 dollar estimate reflects what the company is mathematically valued at today. Be suspicious when you see one estimate so far off from the rest. They may be wrong or they may be a seller looking for buyers. At this point I am indifferent on Tesla. Although Tesla is obviously overvalued I have decided not to purchase puts on the company because they are obviously overvalued as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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