Here's Why Telsa Is Not Overvalued

Chris Lau, Kapitall: If an investor knew nothing about Tesla Motors (TSLA) but looked only at its stock chart, it would look like the company was overvalued. The modern automobile maker is up against traditional car makers like Ford (F) and General Motors (GM). Tesla traded at around $30 for much of 2012, but by the end of April 2013, shares shot up to as high as $114.90. It is not a sure bet to assume that Telsa shares will fall because it moved up too fast, or that it has formidable challenges ahead. Tesla could fall tomorrow, or in a year, but the large short bet against the company could be ill-timed. Short float is currently 28.6%. 

Income

Investors should not bet against Tesla. Telsa’s income statement reveals significant strength. Sales at Tesla grew from $26.65 million in the quarter ending June, 2012 to $561.79 million by March 2013:

Screen shot 2013-06-10 at 11.18.09 AM

Profits

For the quarter ending March 2013, Tesla was profitable. The company earned $11.25 million. Profits declined annually, but 2013 suggests future quarters of profitability.

Screen shot 2013-06-10 at 11.17.41 AM

Sales

Few investors know how many cars Tesla will sell. Sales should be expected to rise, helped by improvements in battery capacity and a lower sticker price.

Comparison

Tesla is much smaller than GM and Ford. Since Tesla is not yet profitable for the full year, it does not have a computable forward P/E. By comparison, GM and Ford both have a forward P/E of 10:

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GM was recently added back to the S&P 500. Ford is also recovering. The company reported sales rising 14% from last year. Ford’s Fusion reported its best-ever delivery in May 2013, by selling nearly 30,000 units.

Conclusion

A stronger economy, especially in the United States, is supporting strong demand for automobiles. Tesla is a new-age technology company in the old economy of cars. Euphoria could continue to build, pushing Tesla even higher. Fear of overvaluation could also drive Tesla down. The bottom line is that investors do not know when the momentum would shift. One thing that is certain is that a bet against Telsa at this time could be ill-timed. Investors who do not have a position in the company should not take one at this time. Conservative investors who think the automobile recovery will continue might want to consider GM or Ford.

Written by  Chris Lau.  Disclosure: Author has a long position in Ford (F).

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