Tesla: From Wall Street Darling to Goat?
Elon Musk's Tesla Motors (TSLA) - Get Report is a controversial company that for investors entails many pros and cons. Below, we sort through the white noise and determine whether Tesla is a smart buy now, or whether your money is better spent on more appealing growth opportunities.
While Tesla's market potential is strong, its dizzying valuation is causing plenty of heartburn for shareholders.
Firstly, Tesla isn't doing a great job at keeping executives. Two top execs overseeing manufacturing and production are leaving. Tesla has now lost as many as five VPs in a space of three months. The company's SUV model has already suffered nearly 18-month delays. Its reasonably priced Model 3 is the first real shot for Tesla to go mainstream.
Unless you think Tesla can sell cool electric cars to the masses and dominate that market, the 64-times forward valuation is always going to look steep.
By comparison, traditional car makers like Honda (8.8 times), Toyota (7.3 times), Daimler (7.6 times), Ford (6.3 times) and General Motors (5.2 times) look like bargain alternatives. They also offer electric and hybrid cars.
Secondly, from its earnings point of view, Tesla is still a start-up that refuses to grow. While its first quarter revenue rose 45% year-over-year, there was a net loss of $0.57 (a penny better than estimates). From 2007 to 2015, Tesla has reported a net loss of $2.5 billion.
While the Powerwall battery products and the planned gigafactory in Nevada are great ideas, Tesla's forecasting abilities on deliveries have been questioned.
And now, Musk suggests that the company should be making around a million cars a year by 2020. Don't be too floored by these projections.
Tesla made fewer than 50,000 cars last year. For Tesla to stay on its fresh 2020 path, it would have to produce more cars next year than the entire 2015 output by the global electric-car industry.
The 500,000-car target has already been moved forward to 2018. Before the designated launch date of late 2017 for Model 3, Tesla needs to massively ramp up its production capacity.
Tesla bulls, on the other hand, want you to focus on certain strengths that they say position the company for market-beating gains. Any comparison with mature car makers is a strict no-no. If Tesla is valued at $63,000 for every car it aims to make by 2020, then Netflix is worth $500 for every subscriber, Facebook is worth over $26 million per employee or Apple is worth $6,600 per iPhone sold last year.
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Bulls are very clear on Tesla's capability and potential. Tesla has possible access to a market of 19 million buyers. That's 19 times the 1 million target Tesla wants to hit by 2020. That's still far less than the U.S. car-buying population as a whole.
The fact is, Musk knows something about the Model 3. The hunger for Tesla's cars as seen through the Model 3 demand makes the future brighter for the stock. The Tesla and Musk combo has driven a huge premium and shorting it would be unwise.
Another factor is the slow but improving profitability of Tesla. From an operating margin south of -500% in 2008, in 2015 Tesla finished with -17.7%. As its sells more cars, it keeps getting better. By advancing production estimates, Tesla is telling you that it can produce those cars quicker.
The real problem is different: Tesla is not struggling to attract customers; it is struggling to meet current demand. That's a challenge for any company anywhere in the world and it's a nice problem to have. Sure, it may raise capital to fund its ambitious plans but with a $1.2 billion cash hoard and $2.9 billion debt, Tesla is by no means an over-leveraged company.
With a five-year per annum return of 51%, Tesla has blown away shorts and naysayers. Our verdict: If you have the stomach for volatility along the way, stick with Tesla for outsized profits over the long haul.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
