Any investor who has ever heard of Tesla (TSLA) is probably aware that the
stock is currently up more than 400% so far this year. With gains such as that
many people are continuing to jump onboard and ride the wave. But not so fast. Keep
in mind that I like to follow Warren Buffet’s advice to be fearful when
everyone else is greedy and be greedy when everyone else is fearful. However, aside
from that and the fact that history has proven in most cases that extraordinary
gains like this are eventually followed by a sudden and resounding crash, here
are some cold hard facts you can take to the bank, or your broker while you
place your sell order.
Seeking Alpha’s Ayush
Singh has come up with a nice comparison between Tesla and other car
manufacturers to illustrate how overvalued Tesla is currently.
The company expects
to sell 21,000 cars in 2013 and is presently trading at around $165, which
translates into a market cap of just under $20 billion. But, given the amount
of cars Tesla sells, this valuation is too high to be justified.
Aswath Damodaran, a Professor of Finance at the New York University, may
not be a household name, but he's made some of the most accurate share
valuations in the recent past - predicting Apple's peak and Facebook's low, to
name a couple. And now, after doing his math on Tesla, Damodaran
concluded that Tesla is worth $67.12. When he came up with this figure,
Tesla was trading at $170.62, and after working out a comparative index, I
believe he may be right.
In this index, I compared Tesla's share price with its production and
profitability and compared it against the other big guns of the automobile
industry and this is how the results stacked up.
|
Company's Name
|
Market Capital
(Billion)
|
Unit Production
|
Value/Car
|
|
General Motors (GM)
|
$49.91
|
9.288 million
|
$5,512
|
|
Ford (F)
|
$69.38
|
5.708 million
|
$12,126
|
|
Toyota Motor (TM)
|
$204.29
|
9.692 million
|
$21,297
|
|
Honda Motor (HMC)
|
$72.49
|
3.137 million
|
$23,015
|
|
Tesla
|
$19.97
|
21,000
|
$950,952
|
Source: Yahoo Finance, Bloomberg, Zacks and Author's Calculation
Hence, Tesla is charging close to $950,952 per car, which translates into
around 14 times the actual cost of the vehicle under the assumption that it is
free to manufacture! Given real operating gross margins of 13% on its
$70,000-priced Model S, Tesla is generating about $9,000 in gross profit from
each car that it manufactures. Despite that, investors are placing an
irrational valuation of around $950,952 on every car! Going by such
calculations, Tesla will need to enhance its production by 20 times in
order to be twice as expensive as Honda, which is the next big car maker, on a
value-per-car basis.
A 20-fold jump may seem far-fetched, but that is exactly what Tesla bulls
anticipate and they expect it to happen before 2020. But even if the company
somehow manages to multiply its production by a factor of 20, will it justify a
market cap of $20 billion or will it have to sustain its growth for a longer
period of time to justify today's share price?
Dana Blankenthorn has a strategy for Tesla investors based
on the fact that even Elon
Musk acknowledges Tesla is overvalued.
How you deal with this depends on the kind of stock owner you are.
Traders may continue getting profits out of Tesla for some time, but they must
be warned that, when the fall comes, it will be sharp and sudden. Careful
attention must be paid to small technical moves, to any move regarding
momentum, or you'll lose your gains in a heartbeat.
For investors who may have bought their shares in the first quarter of
this year, when the price was less than one-third what it is now, the situation
is different. You can sell less than a third of your present stake and have all
your investment out of the stock.
While the company may not be worth today's $20 billion, it may well be
worth yesterday's $5 billion. Sales have been doubling every year. Gross profit
is 25%. These are unheard of for a mass manufacturer. You're betting that Tesla
can indeed use robotic manufacturing technology and scale to bring the company
into lower price points, and get ancillary gains through the battery business.
These are not unreasonable assumptions.
But I wouldn't pay 50 times sales for that, which is what you're
presently paying. On a fundamental basis, Tesla is in a bubble. Those who
believe in fundamentals can take their profit and wait for the bubble to pop -
although they may risk some remaining momentum gains - or take out their initial
investment and know that, even after the bubble pops, they're in the clear.
If you were one of the lucky investors who purchased your
shares earlier in the year, you should consider cashing out now while you’re
significantly ahead. Alternatively you can decide to hold onto those shares, or
even continue putting more money in, but doing so would be a very risky move,
even if you have the ability to hang onto them for many years to come.
