Looking At Tesla From Outside The Possible Bubble

Chris Lau, Kapitall: Investors might be tempted to dismiss companies that break out on the upside as being in a bubble. In the last three months , Tesla Motors (TSLA) rose by more than 50% and is up 352% in 2013. With such massive returns, investors should ask if Tesla is in a bubble, or if things are different this time.

[Read more from Kapitall: Hedge Funds Booking 3 Rallying Tourism Stocks as International Travel Soars]

Beyond 50% return

Click on the image below to see prices over time. Sourced from Zacks Investment Research. 

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Tesla received a $230 target price from Northland Capital in mid July. At the time, shares were $120, well above a $40 stock price in April 2013. The firm then suggested the stock was worth $300 if the factory was running at its maximum capacity.

Positive momentum is supporting the upward trajectory for Tesla stock. Investors are excited that Tesla could improve the charging times at supercharging stations. If Tesla can cut times from 20 minutes down to as low as 5 minutes, then the current share price may be justified. Quarterly earnings that beat estimates on earnings and sales are another reason shares are up. In the last quarter, Tesla earned $0.20 per share (non-GAAP) on revenue of $405 million. Analysts expected Tesla to lose money (GAAP) in the quarter. Profits are low but not negligible at this time, because Tesla is investing its profits in its infrastructure and manufacturing capacity.

Strong gross margins

Tesla aims to have a 25% gross margin (including ZEV credits). In the last quarter, gross margins were 12 points away from that target. Manufacturing capacity is also improving. Tesla said in its conference call that it had the manufacturing capability to make 40,000 units if it chose to do so. The company does not want to over-produce the units, and is monitoring demand. The capacity is also limited by Tesla’s suppliers.

What investors should consider

Investors might want to remain emotionally detached from the positive momentum supporting Tesla’s rise. Tesla trades at a forward P/E of 150 and a price to sales ratio of 18.6. These figures suggest Tesla could be in a bubble, but investors have seen this before with companies exhibiting phenomenal growth in a new industry. By being emotionally unattached, investors can more readily make the decision to take profits on hand. Selling a proportion of holdings now would lock in profits. That way, any potential decline will not be so damaging to overall returns. 

 

Written by Chris Lau, Kapitall contributor. All data sourced from Finviz.

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