Why I'm Not Investing in Tesla – Yet


Tesla's Model S. Photo Credit: Tesla Gallery.

Investors would be hard pressed to find a hotter topic under discussion out there today than the bull versus bear case on Tesla (NASDAQ: TSLA  ) . If you were savvy enough to invest in Tesla six months ago, you're sitting pretty with a 223% increase in that time frame. Some investments never have that type of success before the companies close the doors and file for Chapter 11, so pat yourself on the back Tesla and Tesla-savvy investors. I cover the auto industry for The Motley Fool and I call it like I see it, always – that's what has me a little perplexed with Tesla as an investment. Here's why.

Numbers never lie?
If all you do is look at the trailing-12-month numbers, you'd obviously run away afraid of Tesla as an investment – you wouldn't touch it with a 10-foot pole. Scratching the surface more, you'll see its price to book ratio is around 72 compared to an industry average of 1.7. Its price to sales in the trailing 12 months comes in at a staggering 12.6 compared to the industry average of 0.6. However, in Tesla's case, those numbers aren't exactly fair for such a young company that's disrupting an industry due for a revolutionary product. 

Tesla's market cap totals roughly $12 billion right now. If you take a look at Ford (NYSE: F  ) and General Motors (NYSE: GM  ) they cap out at about $60 billion and $45 billion, respectively. That means that the market considers Tesla to be valued at roughly one-fifth of Ford and slightly more than one-fourth of GM. That seems pretty lofty if you consider that GM sold over 9 million vehicles globally last year, compared to Tesla's goal of breaking 20,000 this year.

Bullish investors are quick to point out that Tesla has crushed most competitors in the large luxury segment. Tesla's Model S outsold Audi's A8, BMW's 7-Series, and the Mercedes-Benz S Class. It should be mentioned that the Model S also largely trailed Cadillac's XTS through March. 

I'll also point out that bullish investors boast the fact that Tesla repaid its government loan back quickly, and has handled a voluntary recall rather impressively. Tesla also boasts a business-savvy CEO, Elon Musk, who seems to turn every business he touches into gold.

According to CNNMoney, Ben Schuman, an analyst at Pacific Crest Securities, said in regard to all the positive Tesla news: "[The] current stock price reflects flawless execution and has likely gotten ahead of itself."

Bearish investors are quick to point out that its valuation is astronomically high and that Tesla is but a small fish in a big pond. "There seems to be some euphoria," Takuo Katayama, an analyst at Daiwa Capital Markets, told CNNMoney. "I don't want to say it's unjustified, but it's getting there." 

My take on things
I find myself somewhere in between the bull and bear cases. I see a company that has a real solution, with an innovative product in an industry begging for a revolutionary vehicle. I see a CEO that understands business, and has a vision of where our future solutions will come from. I also see a company with shares trading at a future P/E ratio over 120. That's otherworldly compared to those of Ford and GM, both of which trade around 10 times.

I'm excited about the product and planned growth for Tesla as it hints toward a cheaper mass produced vehicle. It's squashing skepticism with early adopters because of its battery swapping capabilities and supercharging stations. Many intelligent people are bullish for good reasons, and 10-20 years down the line Tesla could be the investment that makes many in our generation rich.

All that said, it doesn't mean you can't get Tesla shares at a better price than what it trades at today. Tesla is priced for sheer perfection as we move forward, and even the best companies stumble. When that happens, and Tesla's valuation comes back down to earth, I'll heavily consider investing in the company. Until then, I think Tesla has come too far, too fast, as an investment – although the company itself is spectacular.

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Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2013, at 6:57 PM, StanO6 wrote:

    Comparing TSLA to other companies might be okay.

    Because there are plenty of CEOs that build rocket-ships...

    ...in their spare time.

    Oh. Wait. There isn't.

    There is just Elon.

    You know you want a piece of TSLA!

  • Report this Comment On June 28, 2013, at 7:21 PM, jamesdan567 wrote:

    Well, Tesla is expected to sell around $2.2 billion this year. As of today, that would put them at 5.6X sales. CRM is at 7X sales and doesn't make a dime. LULU is at 6.7X sales after their CEO bailed out.

    GOOG is around 5X sales. ORCL is at about 3.7X sales. FB is around 10X sales. LNKD at 12X-13X

    so, obviously, Tesla is not selling at an unheard of level of sales. PE ratios are irrelevant until they get their factory utilization up to par (around 400K annual units)

    or maybe FB and LNKD and CRM and LULU are just out of this world?

    with, obviously, the strongest CEO of any public company, and obviously, the market leading EV in the emerging EV market globally, and obviously, the potential to cause the conversion of hundreds of millions of autos globally to EV's from ICE, Tesla seems undervalued to me. it should be closer to 200.

  • Report this Comment On June 29, 2013, at 12:13 PM, StanO6 wrote:

    Mr. Miller, something to consider: Dollar Cost Averaging. Buy a little now. Buy a little later. Wash, rinse, repeat.

    That way you will not feel "left out in the cold" when TSLA has their next major jump.

    Capiche?

    Timing the market is a "fool's gambit". Trust me on this. I know.

  • Report this Comment On June 29, 2013, at 11:09 PM, TMFTwoCoins wrote:

    That's fair Stan, I typically buy in thirds unless the stock takes off after initial investments. But that's the theme of this article, If i'm going to buy, it's not right now. I could be wrong, because a company like this is very boom or bust and speculative. If i'm right, I'll get in this stock as it lowers when, as I believe, people realize it's too highly valued.

    Unfortunately, if I'm wrong I'll have missed out entirely. I guess that's the risk of avoiding what I think is an overvalued stock right now. In the perfect world it drops back to $50-60 and I can initiate a position. I would have initiated a position earlier except much of my money is tied into Ford -- which I consider to be in excellent position going forward.

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