Tesla's Valuation: From Ridiculous to Gary Busey in 5.8 Seconds

Last month I did my best to describe why I felt that electric vehicle maker Tesla Motors' (NASDAQ: TSLA  ) valuation appeared ridiculous. To do this, I conjured up my own metrics which I felt demonstrated beyond a shadow of a doubt that on a fundamental basis Tesla was overcooked and ready to be sent back to the kitchen.

And then Tesla reported its second-quarter earnings results last night and things quickly bypassed ridiculous and went to a new level of crazy that I now refer to as Gary Busey.

Why Gary Busey? Because Tesla Motors, like Gary Busey the actor, has managed to rise to the big show from obscurity. No one believed Tesla would be successful at mass producing an electric vehicle; succeeding where other automakers, such as General Motors (NYSE: GM  ) with the EV1 and Toyota (NYSE: TM  ) with the RAV-4 EV, had failed. But it has been successful on a large scale: Tesla's Model S is selling so well it can't produce the car quickly enough to meet demand.

But the reason I also equate Tesla to Gary Busey is that on a scale of sane to crazy, Gary Busey is often viewed by the media as being in his own world, which is exactly where Tesla's valuation traveled today.


Source: Steve Jurvetson, Flickr.

The nitty-gritty of Tesla's second-quarter results is that things are improving. You heard me right: Elon Musk's company is looking better than it did one quarter ago. On an adjusted profit basis Tesla earned $0.20 per share and delivered $405.1 million in revenue which is more than 15 times what it produced at this time last year. Comparatively, the Street expected just $386.9 million in revenue and a loss of $0.19 per share. Furthermore, Tesla delivered 5,150 cars which topped its own quarterly guidance of 4,500 vehicles. 

Those were the good aspects of this report. I'm not going to deny that Tesla produced those figures or topped its delivery expectations, but I also want to point out some of the figures that Wall Street seems intent on ignoring that help prove just how insane the valuation on Tesla has become.

Tesla unmasked
For starters, let's begin with Tesla's bottom-line profit of $0.20. This figure represents Tesla's adjusted profit, including the benefit of zero-emission tax credits, and excludes one-time fees. Ultimately, Tesla reported a narrower, but still hefty, GAAP quarterly loss of $0.26, or $31 million. Don't be too surprised about Tesla'a GAAP loss as the very first sentence of its quarterly shareholder letter notes that profits are "not our primary mission"!

Even revenue figures were masked by a GAAP/non-GAAP bias. Because of a reduction in price of $10,000 per car that Tesla honored for orders of discontinued 40-kWh battery packs, revenue was actually flat compared to the first-quarter... but investors seemed to ignore that fact.

Let me not also fail to mention that it recorded a cash outflow of $38 million during the quarter. Instead, the big boost in cash on Tesla's balance sheet comes from what will wind up being a 4.5 million share dilutive offering and not from cash generated from the sale of its automobiles.

How about margins you say? For the quarter we certainly saw gross margin improve to 22% from 17%, but these are non-GAAP margins. In layman's terms it just means that this figure includes those one-time benefits like ZEV credits. If you strip those out of the equation, the real production margin on Tesla's operations is a meager 13%. Sure, that's a nice improvement from the 5% it produced in the first quarter, but it's a long way to go to a target of 25% with just two quarters to go before its ZEV credits are gone for good.

Let's also examine Tesla's quarterly production. There isn't much negative I can take away from Tesla yet again outrunning its own guidance on the production front with 5,150 Model S sedans produced during the quarter. Yet, oddly enough, Tesla didn't boost production guidance for the remainder of the year, choosing to keep it at 21,000 units. The reasoning is that many of the cars produced toward the end of the second quarter are now on their way to Europe and won't get there until well into the third quarter. So despite producing more cars than expected this quarter, Tesla's production capacity really didn't improve, at least from Musk's forecasting standpoint.

The price of insanity
Now that you have a better understanding of what's really hidden beneath Tesla's one-time costs and benefits, let's have a look at the meat and potatoes of just how expensive this company has become.

Basing my calculations on Tesla's last after-hours trade at $153.20, Tesla now commands a market value of $17.7 billion, which is higher than robotic surgical device maker Intuitive Surgical, confectioner Hershey, and handbag and accessories maker Coach. Though in different sectors, what these three companies have in common is that they produced $672 million, $817 million, and $1.04 billion, respectively, in free cash flow last year. By contrast, Tesla Motors has struggled to even deliver breakeven cash flow from its operations.

On a forward basis, Tesla is valued at roughly 150 times forward earnings. For those of you who like to trump Tesla's revolutionary new product as a reason for its frothy valuation, I'd like to point out that the company's projected growth rate next year is going to slow dramatically to just 25%. Running the math on Tesla's price earnings to growth ratio leaves us with a ridiculously high PEG of six! Normally anything over three should sound the alarm in your head.

But, let's also revisit my price per car tabulation that I examined last month and see how this valuation has become even more distorted.

Company

Market Cap

2012 Production

Value/Car

General Motors

$49.11 billion

9.288 million

$5,287

Ford (NYSE: F  )

$65.93 billion

5.708 million

$11,550

Toyota

$202.1 billion

9.692 million

$20,852

Honda Motor (NYSE: HMC  )

$69.2 billion

3.137 million

$22,059

Tesla

$17.7 billion*

21,000**

$842,857

Source: Yahoo! Finance and author's calculations. * Based on after hours price; ** based on 2013 projections. 

In general, the figures for the other carmakers haven't changed much since last month, with each company offering its own unique selling points. GM is in the process of introducing its new line-up of redesigned trucks (the Sierra and the Silverado) in the U.S. for 2014; Ford is focused on pushing its fuel-efficient small cars and EcoBoost-powered vehicles in China and domestically; and Toyota and Honda are both targeting a push that'll help them reclaim lost market share in the U.S. by focusing on fuel-efficiency and value.

Then there's Tesla, which I thought was grossly overpriced at $600,000 per car three weeks ago. Based on last night's after-hours price, Tesla is commanding close to $843,000 per car – in other words, about 12 times the actual cost of the vehicle with the assumption that it's free to produce! With real operating gross margins of 13% on its $70,000 Model S, Tesla is reaping about a $9,000 gross profit from each car produced, yet we're willing to place a valuation of $842,857 on each car! Based on the above calculations, Tesla would have to boost its production by a factor of 20 just to be twice as expensive on a value-to-car basis as the next highest big automaker in the table above, Honda. By this context Tesla's valuation could be up to 10 years ahead of itself.

Is this the craziest valuation ever?
Given Tesla's numerous production gaffes leading up to the debut of the Model S, I have a strong suspicion that its Model X SUV will suffer numerous delays next year. Let's face it, production was already pushed back a full year to 2014. Tack on the fact that the infrastructure to support EV battery replacement and recharging isn't there for a good chunk of the public, and pricing on the Model S is well beyond the scope of most budgets, and you have even more reasons to avoid this stock.

I remember seeing some pretty frothy valuations in the heyday of the tech bubble, but I can't recall any company in recent history that has commanded as lofty a bounty as Tesla. I very recently initiated a short position in Tesla and, when the Fool's disclosure policy allows, I will almost assuredly be adding to that position.

What if Tesla is able to catch hold in the booming Chinese luxury-car market? Whether you realize it or not, China is already the world's largest auto market debut and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free debut just click here for instant access.


Read/Post Comments (63) | Recommend This Article (24)

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 August 08, 2013, at 6:42 PM, Ustauber wrote:

    Lets face it you got burnt.

    Lol

    Just go home and lick your wounds !!

  • Report this Comment On August 08, 2013, at 6:49 PM, Decoy0527 wrote:

    Thank you for some sanity in reporting Tesla's continuing quarterly losses. I admire Elon Musk and wish him well. However, he is a smart guy and he knows he has most financial writers in the palm of his hand. I'm a retired CPA (auditor) and it is just wrong that Tesla (and SalesForce) can so casually change what they call "net income" to just about anything they want to. If you read the companies press release on its net loss, it so intermingles GAAP and Non-GAAP as to make non gaap seem normal. It is not normal. GAAP is normal, and for good reason. Without GAAP standards, we would have chaos in financial reporting. For the record, Tesla had a net loss of .26 cents per share for Q 2 of 2013. Tesla and all financial writers should start with the .26 cents per share net loss, and then go ahead with whatever explanations they want. It is wrong that the average investor now thinks that Tesla had a profitable quarter. THEY DID NOT.

  • Report this Comment On August 08, 2013, at 7:00 PM, marcoinNY wrote:

    Can anyone blog here regardless of their understanding of how things work? The whole point if purchasing a stock is future earnings. The question is does the market think that Tesla can sell enough cars to justify the price in the future. They are in a huge growth point in the business lifecycle. Google was valued at 200 Billion with very little relative earnings a few years ago. If they can sell 500k cars per year in 10 years, the price is fine. If they do, they would earn 2 Billion per year at 4k per car. They could still be growing and valued at 25 times earnings. That would be 50 Billion.

  • Report this Comment On August 08, 2013, at 7:16 PM, RussellL wrote:

    "I very recently initiated a short position in Tesla and, when the Fool's disclosure policy allows, I will almost assuredly be adding to that position."

    Sean, please keep us abreast of how your TSLA holdings are doing.

    Mine are doing great! LONG.

  • Report this Comment On August 08, 2013, at 7:18 PM, drax7 wrote:

    EV is the future, tesla has first mover advantage. The Addressable market is huge.

    Just like amazon and Netflix.

    Time to adjust tour mentality.

  • Report this Comment On August 08, 2013, at 7:23 PM, perplexed33 wrote:

    Is it really so difficult to understand that what we are dealing with is a complete worldwide change? We are at the verge of the whole world switching to electric cars. It has just began and it will take a while, but in a few decades gas-driven cars will look like dinosaurs.

    Now. Everybody who is buying Tesla at this "crazy" price wants to be first to get into this unique opportunity. It is like buying a duck that will lay golden eggs. The duck is not worth much, but the future eggs are.

    You can complain about the duck being just an ordinary looking duck and argue that it could only feed a few people if killed, but then you miss the future gold.

    Yes, the stock is expensive, but 20 years from now when every second person drives an EV (preferably a Tesla), and every other car manufacturer buys Tesla technology, the $152 stock could be worth hundreds or even more as much as it is today.

    Ever heard of exponential growth? Tesla will grow exponentially until hundreds of millions of people will drive their Teslas.

  • Report this Comment On August 08, 2013, at 7:29 PM, TMFUltraLong wrote:

    perplexed33,

    I appreciate your position, but the argument of investing for the future has lost its perspective with Tesla. Just how far into the future are we looking here?

    If it takes 10 years for Tesla to ramp up to 400,000 cars per year (a level that I surmised would make it only twice as expensive as the current most expensive large car maker out there) then why aren't we valuing other revolutionary products 10 to 15 years in advance. Biotech companies can change the face of medicinal treatments, but we don't value them at 2023's sales figures. Apple revolutionized the way we use our phones and connect to the internet and each other... but it never was valued at its 2023 earnings potential. It could indeed be 10 years before Tesla's profitability matches where it's valued at today. So I ask, how far into the future is too far?

    TMFUltraLong

  • Report this Comment On August 08, 2013, at 7:31 PM, TMFUltraLong wrote:

    drax7,

    It's a cost of ownership issue... Amazon doesn't cost anything to use unless you choose to buy something. Netflix, likewise, is $8-$20 out of your pocket each month. These are easily accessible, mass-targeted website. Tesla makes one EV, costing about $70,000, targeted at a very finite piece of the population. Is there a comparison I'm missing?

    TMFUltraLong

  • Report this Comment On August 08, 2013, at 7:32 PM, TMFUltraLong wrote:

    Russelllee,

    As I stated in July, my first short was at $124.75. I'll be looking to add to that position when the Fool's disclosure policy allows. I prefer to edge into my positions slowly and build them up over time so this is nothing new. With regard to my largest holding, I've made 18 separate purchases of it... so needless to say I enjoy nibbling =)

    Fool on!

    TMFUltraLong

  • Report this Comment On August 08, 2013, at 7:34 PM, TMFVelvetHammer wrote:

    Sean, that's one of the best headline's I've ever seen. Great job with that alone!

    I agree with you on Tesla's valuation. And I own shares that I'm not selling. I bought about 1% of my port's current stock holdings (with a lot of cash not invested from a rollover) that's grown to over 3%.

    But since I'm not cashing that part out for another 30 years, I ain't selling. Though I did sell half at ~$99. Eventually the market will back off, or sell off, or whatever it does. No matter how successful the company is over the next decade, there will be a "correction" in the share price.

    Investors in Microsoft in 2000 are still behind today, 13 1/2 years later, even with the company having grown sales and income over 200% since then, and reduced shares outstanding something like 20%.

    It's never "different this time", no matter how hard we want it to be when things are really good.

    And I'm a current shareholder.

    Nice job.

    Jason H

  • Report this Comment On August 08, 2013, at 7:34 PM, naterstg wrote:

    So why focus on only the negative. It offers no insight into why the stock is sky high except that those investing are "crazy". There must be something here which you are choosing to ignore, exposing yourself to risk.

    Seems like if you can explain the upside then you might be able to formulate a strategy and time table for the downside, but you don't address this.

    Seems dangerous to me. Good luck!

  • Report this Comment On August 08, 2013, at 7:51 PM, speculawyer wrote:

    @marcoinNY

    Yes, TSLA is valued on its future. But the problem is that they can't grow like that. The EV biz just won't grow that fast. There are not enough customers for a $70K car and it is impossible to build the $35K car with a 200 mile range. If it becomes possible to build such a $35K car with a 200 mile range then every other automaker will do the same. Tesla does not have any magic that the other automakers lack.

  • Report this Comment On August 08, 2013, at 8:01 PM, spawn44 wrote:

    Where's the HUGE growth. 2nd. quarter sales were bascially flat compared to 1st. quarter. No increase in production. That's what makes no sense.

  • Report this Comment On August 08, 2013, at 8:01 PM, autoinsider wrote:

    I smell smoke as in the books and numbers. After two years and the early adopters are on to something new and improved, it'll be "what happened"?

  • Report this Comment On August 08, 2013, at 8:14 PM, jamesdan567 wrote:

    Investors care more about cash flows and prospects than dumb GAAP any day. I was a CPA for a long time, and GAPP is not what management uses to manage business. GAAP is for managing the reports and that's it. Cash is King.

    So the author admits he royally screwed up his last report, and now sets himself up in this report for a defamation lawsuit from Gary, and we are supposed to consider this garbage worth reading? It is normal that valuations of growth companies run in advance of their results. Particularly when the growth company, Tesla, is disrupting the apple cart of a $2.0 trillion+ annual industry.

    Tesla is firing on all cells but is a long way from "fully charged". The overall consensus of tens of thousands of investors putting billions at risk is that the company is worth $153 a share. Get used to it. its going to go up a lot more as Tesla executes its plans.

  • Report this Comment On August 08, 2013, at 8:27 PM, LADJ wrote:

    Gary Busey is in the eye of the beholder.

    Keep shorting the best stock in the market, Bro. One day, when its bled you dry, the stock may drop a buck or two to catch its breath and you can claim victory.

    Even a broken clock is right twice a day. But you are dead wrong about Tesla.

  • Report this Comment On August 08, 2013, at 8:37 PM, champinvest wrote:

    Well keep on writing all this :), thats what i heard when it was at $90, please understand Tesla is a game changer company and it will soon be going up at a stock price $200 :)

  • Report this Comment On August 08, 2013, at 8:42 PM, ckgod wrote:

    People why argue? The fact is there that Elon Musk has proved how good he is to execute and the market has responded by granting him all benefits of doubt. It's for him to screw up and it does not look like he knows how to. When was the last time you see some thing like this happened? It's not just luck or the right time at the right place he has created the whole thing (many times) from his great vision (remember Steve Jobs) can't you see? Compare him to people who run GM or Toyota just shows how brainless you are.

  • Report this Comment On August 08, 2013, at 9:05 PM, yusra007 wrote:

    Edison's electric bulb? who cares about it. Gimmick for the Melo Park elite... will soon fade away. I really love the PE ratio of the all the gas light makers, their PE ratio is so in line with my investment philosophy.

    This is the mind set of the Tesla naysayers. The ONLY thing Tesla has in common with other cars is that it also has four wheels. The comparison stops there.. PERIOD. Nobody should be allowed to make negative comments about Tesla unless they have visited the store and test drove one. I bought shares around $ 43, I also was a total non believer in electrics until the day I saw a Tesla MS parked outside our office. I knew tat that moment that he revolution has started.

    It is astonishing that even educated people have absolutely no clue even now what a game changer this is.

  • Report this Comment On August 08, 2013, at 9:37 PM, ckraider118 wrote:

    I hope no one reads your stuffs. Probably discouraged some folks from buying when TSLA was much lower.

  • Report this Comment On August 08, 2013, at 10:08 PM, SteveTG3 wrote:

    Sean, I found the most compelling explication of the ignorance of your writings about Tesla to have come from Tom Gardner, Motley Fool Founder and CEO.

    In the last article's comment section, he wrote:

    I believe that if Tesla proves to be overvalued, and ends up delivering subpar results over the next 10 years, Sean will have been right. . but. . for the wrong reasons. The arguments made here are not supported by the evidence at Tesla and, more importantly, by the evidence at other disruptive innovators in the world's history.

    I'll take just one example.

    Sean calls out Elon Musk, suggesting that he cannot be trusted, that he is Mr. Broken Promises. Why? Because he pushed back production. Hm. Didn't Steve Jobs push back production. Wasn't Apple hampered by delays and antennagate, and you name it. Innovation doesn't dance to the metronome. Getting things right for the very long term is much more important to the true innovator than is "showing up on time." (I highly recommend reading the work of William James 100+ years ago on how he located geniuses while teaching at Harvard. One key factor? They never showed up on time, if at all.)

    The other argument here that feels very weak to me are all these valuation comparisons to plodding, slow, debt-ridden automakers. I remember when Amazon's valuation was compared to that of Borders. I also remember an executive at Barnes & Noble dismissing Amazon as "generating less sales across its entire business than we do at a single store in New York City." How you like it now? Taking companies that don't show prospects for sustained, superior growth rates and presenting them as the best comparison to ones that do. . . is a bad idea. Shorting stocks based on this approach could lead to disaster. This valuation approach would have, in 1992, had you laughing wildly at Whole Foods as you pushed your cart through Safeway, while sipping your cup of Sanka and mocking Starbucks. You'd have paid $200 per transaction with your Dean Witter broker to buy your Safeway shares, and called in a short of Charles Schwab while you were at it. (Reminds me of the Saturday Night Live skit, Bad Idea Jeans.)

    Still, though, Sean, you could be right for the wrong reasons. And your rightness also might depend on your timeframe. Could Tesla stock get cut in half from here? Of course it could. Amazon is a $140 billion business now (Borders isn't a business). But on Amazon's path, their stock once fell 90% (circa 2001). Same thing for Whole Foods (circa 2008/9). And Starbucks got leveled 70%+. Great companies with great leaders can have greatly overvalued stocks that get greatly hammered then greatly turn around yielding even greater long term results. It happens.

    I highly recommend, though, reading and reading and reading what Musk is up to. Here and elsewhere. This is a truly unique person we have in our midst. He is taking on giants, trying to change the world forever. I consider myself incredibly lucky to live in a country where that can all play out, where disruptions are welcome, and the marketplace is open for customers and stockowners to buy and sell what they believe in.

    Fool on!

    Tom Gardner

    Report this Comment

  • Report this Comment On August 08, 2013, at 10:16 PM, weaponz wrote:

    So let us get this straight,Tesla got 9% improvement in Q1, 8% improvement in Q2 and stands at 13% right now. How is getting 12% in 2 quarters seem far away? I wouldn't be surprised if Tesla has 28-30% by Q4 let alone 25%.

  • Report this Comment On August 08, 2013, at 10:18 PM, Capt77thPa wrote:

    Gary Busey is from Tulsa.

    Does that mean the valuation went from Tesla level to Tulsa level?

  • Report this Comment On August 08, 2013, at 10:27 PM, heliskiier wrote:

    Today was the ultimate day to put on a short position. Actually yesterday was pretty good too if you opened and closed it.

    From yesterday's trading action, it appeared that there was a considerable amount of fear and profit taking. I'm sure those who took profits are wishing they'd held, but I don't think any of them are upset about it. As they say, pigs get fat-hogs get slaughtered.

    The gap will fill again, and I'll be covering when it does. This is becoming very predictable.

    It will only take one earnings disappointment to drop this sucker to 50 and that's still nose-bleed valuation. Now you understand how i made 20k yesterday and 100k after last earnings.

    This is not aol.com of 2000. It's a business that has to compete with the most sophisticated auto makers on the planet and they can move so much more quickly than TSLA can.

    They have no earnings. The author is totally correct. Do the math.

  • Report this Comment On August 08, 2013, at 10:37 PM, heliskiier wrote:

    Something to think about seriously. The simple fact that TSLA has a higher market cap than one of the best, most consistent and capital efficient companies on the planet over the past 30 years (HSY) should have everyone scratching their heads.

  • Report this Comment On August 08, 2013, at 10:43 PM, heliskiier wrote:

    Someone up there compared Musk with Steve Jobs. That's' so beyond ridiculous that I'm sitting here laughing out loud. How many cars do these guys make a year? How will profits fall when the green subsidies go away? Still laughing out loud.

  • Report this Comment On August 08, 2013, at 10:55 PM, SteveTG3 wrote:

    Musk, Jobs comparison is pretty absurd heliskier.

    Musk is more Wozniak, Bezos, and Musk rolled into one.

    Speaking of absurd, your suggesting Tesla would have a nose bleed valuation at $50, quite comical or absurd, intent hard to know.

    If this is really how you value Tesla, I suggest you read over Tom Gardner's comments quoted a few posts up from Sean's first article... "not supported by the evidence" as Tom politely put it, suits your remarks today as well as it does Sean's "analysis" last month and again today.

  • Report this Comment On August 08, 2013, at 10:58 PM, SteveTG3 wrote:

    (for anyone new to fool.com, Tom Gardner is one of it's cofounders and the current CEO)

  • Report this Comment On August 08, 2013, at 11:13 PM, TMFUltraLong wrote:

    SteveTG3,

    I never said Elon Musk wasn't a genius or that the Model S wasn't revolutionary. But we as investors are truly terrible at trying to time the next great revolutionary product.

    Genomics were supposed to revolutionize personalized care in the late 90s. Since then these stocks lost 90% of their value and commercial genomics became a mass reality only a few years ago.

    In 2000 the Internet was going to revolutionize the retail industry. It wasn't until roughly 5 years later that this became a sustainable reality and many revenue growth stories went belly up.

    Social media was all the rage in 2011 but Facebook had to lose more than half it's value over a year before it started to figure out that it didn't have all its ducks in a row.

    Near-field communications was supposed to transform how we pay 5 years ago... It's still largely in its infancy and the NFC related stocks have come back to earth.

    Over and over again so called revolutionary stocks come back to earth because traders believe that revolutionary products transform an industry overnight, but they don't. It takes time and mistakes to learn lessons. This current valuation implies that tesla won't make any mistakes. I hate to break the news to you, but not even Warren Buffett has a perfect track record. Mistakes will be made, reality will eventually set in, and Tesla's share price should fall when it does.

    Sean

  • Report this Comment On August 09, 2013, at 12:04 AM, kca124cain wrote:

    With no dealer network, recalls and service is going to turn into a nightmare. This is when those "profits" will really turn downward.

    Currently, there is a 2011 Tesla roadster on eBay, which has minor accident damage (minor being maybe $3,000 damage on a regular car). This thing would not run, and the insurance company totaled it with only 6,000 miles on it. If this is any indication of how Tesla's are going to perform, either insurance companies are going to end up jacking their rates on them, or refusing to insure them.

    TSLA stock is not only way overvalued, but is also very fragile.

  • Report this Comment On August 09, 2013, at 12:05 AM, s2dbaker wrote:

    Hi Sean,

    Let me quote myself from last month:

    "Market value per car? That's not a serious metric. For example, no one looks at Intel and asks how much the market value is per chip sold. It tells you nothing.

    Good luck with your short sale. You may make money but not for the reasons that you've cited."

    So .. how did that short sale work out for you?

  • Report this Comment On August 09, 2013, at 12:20 AM, TMFUltraLong wrote:

    s2dbaker,

    "So .. how did that short sale work out for you?"

    I'll let you know when I cover =)

    Sean

  • Report this Comment On August 09, 2013, at 1:10 AM, SteveTG3 wrote:

    Sean,

    you wrote:

    "But we as investors are truly terrible at trying to time the next great revolutionary product."

    Stock picking is about finding companies that will have above average future earnings performance at a desirable price. No one is talking about timing the market, we are talking about being able to identify a company at a discount to it's probable future value.

    Can you see what Fool.com CEO Tom Gardner was suggesting to you when he wrote:

    "This valuation approach would have, in 1992, had you laughing wildly at Whole Foods as you pushed your cart through Safeway, while sipping your cup of Sanka and mocking Starbucks. You'd have paid $200 per transaction with your Dean Witter broker to buy your Safeway shares, and called in a short of Charles Schwab while you were at it. (Reminds me of the Saturday Night Live skit, Bad Idea Jeans.)"

    as well as this:

    "The arguments made here* are not supported by the evidence at Tesla and, more importantly, by the evidence at other disruptive innovators in the world's history."

    * Tom wrote this in Sean's article last month, I think it applies extremely suitably Sean's last comment to me.

  • Report this Comment On August 09, 2013, at 1:44 AM, sliderw wrote:

    Who cares about a crap metric like "value per car" that divides current market cap by last year's car production? Cars don't even account for all the revenue sources of many of the mentioned companies. What matters is potential future earnings.

  • Report this Comment On August 09, 2013, at 1:48 AM, TurbulentTime wrote:

    Electric car is a totally new market and industry which no car company in history has any success breaking into ... EXCEPT Tesla Motor.

    It has been also a very long time since I last heard of a CEO who is not primarily focused on his salary, but the overall advance of technology and sustainability of humankind and mother nature.

    Period.

  • Report this Comment On August 09, 2013, at 1:49 AM, TMFUltraLong wrote:

    SteveTG3,

    But where *is* the desirable price is the big point of contention. Tesla does have above average earnings potential with its revolutionary product, but it only has a means of sharing that product with a very select niche at the moment because of its high price point of $70k per car and a lack of infrastructure.

    This revolutionary product of Tesla's isn't going to transform the market overnight, yet the valuation on Tesla has exploded higher by roughly 500% practically overnight.

    Could Tesla be worth $153/share in the future? Absolutely! If it continues to grow production capacity at 20% per year, which is fairly aggressive, it'll be producing about 130,000 vehicles per year by 2023. That's still about $136,000 in value per car, or twice as much as the current Model S costs (perhaps adjusted for inflation it'll be a $100,000 car by then).

    But, what's the point of buying Tesla at $153 if there's a really high probability that, given our nature as investors to poorly time the take-off of a revolutionary technology, it'll head lower? Tesla might indeed hit $200 by 2023... but the market may also be significantly higher by then and you could be down on your investment in real money terms.

    Sean

  • Report this Comment On August 09, 2013, at 1:52 AM, TMFUltraLong wrote:

    sliderw,

    I believe It matters if we're talking about identifying undervalued companies for the long term.

    Sean

  • Report this Comment On August 09, 2013, at 1:53 AM, sliderw wrote:

    Also, Tesla is a luxury car maker (primarily). GM, Ford, Toyota, and Honda are not (primarily).

  • Report this Comment On August 09, 2013, at 2:33 AM, SteveTG3 wrote:

    Sean,130,000 cars by 2023?

    while all various analysts have different takes on the probability of successful execution, it's pretty much a given among the analysts (other than Goldman Sachs' game-playing) that Gen III will result in 300K cars before the end of the decade. Indeed, for months now Elon has described production at 300K once Gen III is up and running.

    Beyond 2019? Sean, look for the factory to be at full capacity in 2023, i.e., 500K vehicles, with at least a second factory completed or near completion. 2023 likely 500K+ with a second factory coming online to double production near term.

    yes, there is a scenario of botched/delayed execution, and anyone trying to assign a value to TSLA would be unwise not to model that scenario.

    However, if you are assuming 130K in 2023 is aggressive growth for Tesla, you've proven nothings changed from what Tom Gardner (Motley Fool CEO) observed about your writing on Tesla last month:

    "The arguments made here are not supported by the evidence at Tesla and, more importantly, by the evidence at other disruptive innovators in the world's history."

  • Report this Comment On August 09, 2013, at 2:43 AM, john2000young wrote:

    GM, Ford, Toyota, Honda and all other traditional auto makers compete one another. They can't make any EV to compete with Tesla. That is why the valuation of TSLA is fair.

    Uniqueness is invaluable.

    Look the advantages of EV.

    "Frunk", no tune up, no oil change, no transmission break don't, not transmission fluid, ultra energy efficient and ...

    I have a 10 years old Honda civic, and I am going to replace it by a $35k Tesla 3 years later.

  • Report this Comment On August 09, 2013, at 3:10 AM, JulianCox wrote:

    This is a company disrupting a $2 Trillion industry with the tailwind of history and socioeconomics behind it. This is represented as a deeply felt need for this business to succeed by an economic majority, many of whom are willing to invest hard cash in advance of fundamentals and predict correctly on the willingness of others to do the same.

    Why? Because this company and it's product and service roadmap breaks the compromise between the near-universally-held concern for the role of automotive in contributing to an unnatural environment and the universally held concerns of consumers to receive superior value for money.

    Not only are its products desirable on their merits, it is believable that current and soon-to-be affordable products from this company and those forced to compete with it for survival in the automotive market will be sufficiently widely adopted to change the course of human destiny in which short-term greed and self-destruction are not mutually exclusive.

    The jury is in, when it comes to cars and oil. Not even the most ardent Christian can be sold on the idea of buying a Nissan Leaf for rewards in the hereafter despite the ice caps rolling into the sea for their kids to deal with when they are gone. An attractive sports sedan, an affordable electric equivalent of a BMW M3, or the electric equivalent to a Porche Cayenne super-sports SUV with a F150 equivalent to follow a made in Texas USA? Now that's the kind of blessing for which the good Lord can be truly thanked.

    The result is an unprecedented spectacle in the history of capitalism that has a growing line of customers out of the door thrusting circa $100K cash-up-front on the company (each). An automotive startup that is instantly profitable on the first two quarters of mass production despite aggressive infrastructure spending on a free charging stations, stores and service centers and shows no credible signs of turning in a loss ever again.

    GAAP and Lease Accounting loss in the case of Tesla - Absolutely inapplicable to a right-understanding of reality. Besides providing a residual guarantee, the company is not in any other way genuinely a party to the lease of any vehicle! That would be the partnering banks to its lease program. All cash is received up front by Tesla (read the shareholder's letter). Find another business on Earth that can bank 100% cash up front with profits (and a finance referral commission) and nevertheless be forced by FASB GAAP rules to enjoy a tax loophole that demands the artificially deferred recognition of real and actual profits on money that is in it's bank account.

    Tesla is 5 years ahead of any credible competition. All would-be competition to date is a failure, Audi eTron (program cancelled), Nissan Infiniti (program set back) both effectively citing Tesla Model S. BMW literally a financial analyst's laughing stock (on the earnings call), all the rest actually including BMW are range-hobbled econoboxes and pointless hybrids predicated on the idea that someone is willing to give up convenience (and value for money) to be seen to be "green". They are not, people want desirable cars and then if possible to be green as well. That's Tesla.

    If that is not worth a profit multiple greater than the purely illusory value of Amazon, Facebook, Google, Twitter, eBay (including PayPal) or any other website in cyberspace, then we have forgotten the definition of what matters in terms of value here on Planet Earth.

  • Report this Comment On August 09, 2013, at 3:17 AM, TurbulentTime wrote:

    @ speculawyer, "Tesla does not have any magic that the other automakers lack."

    Really? Well, then please name any other automakers that are already successful with their electric car ventures so far. Thanks for your lack of homework.

  • Report this Comment On August 09, 2013, at 3:19 AM, TMFUltraLong wrote:

    SteveTG3,

    I assumed 300k by 2023 in previous writings... I was merely utilizing 130k as an example of a 20% growth rate.

    As for the evidence of other innovators in history, I'm going to point back to what I said earlier about traders jumping on the bandwagon of a revolutionary idea long before its ready to take off. The internet, social media, NFC technology, genomics... they all succeeded years after when they were supposed to succeed and saw heavy losses from the peaks in the meantime. Shareholders basically sat on dead money in many cases for years or even a decade.

    I don't see how my evidence doesn't support a thesis for gross overvaluation.

    Sean

  • Report this Comment On August 09, 2013, at 3:20 AM, TurbulentTime wrote:

    Already, CEO of GM is scared of Tesla Motors. While, I think GM is a good value, yet it just won't be as good an investment for EV space alone. And, it still seems to me that GM has problem getting its feet wet in the EV segment so far.

    And when I see other automakers have to buy EV credits from Tesla Motors, it tells me something... Other automakers are very good at making gasoline cars... lets just put it that way.

  • Report this Comment On August 09, 2013, at 3:23 AM, TMFUltraLong wrote:

    John2000Young,

    The problem with uniqueness is that investors often overshoot to the upside when valuing unique products. Pick just about any biotech or internet company from the early 2000's and there's your proof.

    I'm not saying Tesla isn't unique or that it's not dominating its share of the EV market. I'm merely saying that we have a market value on a company that may not be deserving of this price based on its rate of growth and profitability until 5 to 10 years down the road, if not longer.

    Sean

  • Report this Comment On August 09, 2013, at 3:25 AM, TMFUltraLong wrote:

    JulianCox,

    I understand your argument and see no reason why citizens wouldn't want to contribute to a cleaner environment. But, that didn't save the solar industry from rising then crashing. Solar is a green form of energy that nearly everyone supported, yet it still crashed and burned badly from its peak.

    Yet again, another example of traders greatly overestimating how quickly a technology will change the world. There's a point where we're looking too far into the future with our valuation models, and I think we're seeing it with Tesla.

    Sean

  • Report this Comment On August 09, 2013, at 4:56 AM, tomatlaw wrote:

    TMFUltraLong,

    You make your points, but you still just don't get it. I can tell you right now with certainty, you will never get to cover under your short at 120. Sure, great companies and disruptive technologies go back to earth at one point or another, but TSLA will go back to earth at a much further point than your 120.

    Comparing TSLA to existing car makers is like comparing apples and oranges. The Model S car is a superior product in everyway to ANY car. Not EV cars, not to hybrids, not to gas. To ANY car. Everyone I know looking for a car right now would buy a S in a heart beat if they drove it. Consumer gave it 99/100. That's the highest score EVER. Of any product. The best product always wins. Just like when the Ipod and Iphone revolutionized music and the cellphone.

    You keep talking about Niches. Its not a niche. Its a better car than any bmw, lexus, mercedes, porche - people would rather buy a model S than all of these gas or electric. It goes zero to 60 in 4.2 seconds and looks like an ashton martin - bargain at 70k. When the Iphone came out it literally took the entire market share of phones in its first couple years because its just a better product. We have here a better product. When the X comes out it'll be a better product than any other car in that class as well gas or electric. You are witnessing history in the making.

    Drive one and you will see why you can never cover without losing money. Drive one and you will see what the future holds and what you've been missing out on.

    Never bet against a product that is just better. Those that to try to hinder innovation always gets burnt.

    PS I sold all my shares this morning, but will definitely get back in. I would love for it to go to 120 at this point, but honestly you miss the point and I had to write.

  • Report this Comment On August 09, 2013, at 9:35 AM, felixy wrote:

    valuation : Porsche is just 14 Billion US $ at the moment- looks dirt cheap in comparison.

    And if the whole world would really turn to EVs- where to find the capacity of electrity needed? Perhaps it is time to buy uranium mining stocks....

  • Report this Comment On August 09, 2013, at 10:17 AM, Borg1977 wrote:

    Sorry, the argument that other electric car makers failed, doesn't count. Those were honorable but clumsy attempts, driven by good intention and not much more. This time we have a guy on top who is literally obsessed in a good way. He is like a dog that found a bone and won't let it go, no matter how you try to take it from him.

    The guy has proven that he is not affected by smear tactics. He fought back when they tried to bash his car. He just laughs off the army of attackers who want to protect the status quo. He actually ENJOYS the challenge that could have discouraged others.

    As opposed to the competition, he is not into hiding the shortcomings of the car. He takes responsibility and makes no excuses. (remember the voluntary recall that impressed people)

    He said his money was the last put in and will be last to be taken out, when other CEO's can hardly wait to sell stocks to buy their mansions. This guy IS DEDICATED and COMPETENT. He is made of the material that will pull through in spite of the difficulties.

    He might look like a dreamer on the surface, but what makes him different is that he has the means, energy and toughness to pull through. Look at him. He is about to send rockets to the space station, changes the way people drive cars and use energy, and is SMILING, because this is what he was born for.

    You cannot bet against this guy. OK, he could be hit by a car, but I take that risk and hang on to my Tesla stocks:)

    And yes, a whole industry is trying to cross him, but in the end they will give in and will start emulating him instead of hindering.

  • Report this Comment On August 09, 2013, at 10:19 AM, Borg1977 wrote:

    One more thing. This guy is not a greedy capitalist who wants to get the most out of people. He is actually working on making people's lives better in the long run and people can sense that. If he succeeds, we will drive more comfortably, much cheaper and breathe clean air.

    As I said the guy is a winner!

  • Report this Comment On August 09, 2013, at 11:09 AM, mowensmd wrote:

    Sean,

    What do you mean by stating a Gen III car at $35k with 200 mile range "can't be built". How do you know this? How do you know when it can be built?

    I tend to believe Mr. Musk's understanding of this project a bit more than you...

    Good luck with your timing.

  • Report this Comment On August 09, 2013, at 11:55 AM, HJ66 wrote:

    Sean:

    I find a couple of things somewhat ironic:

    1) Your name is TMFUltraLong, but you are arguing AGAINST the ultralong case

    2) You say that humans are notoriously bad at timing when innovations will take off and yet you are doing exactly that by shorting the stock.

    Would I be buying at this price? No way. I agree with you that its ahead of itself and am considering taking some of my long money off the table. But I do plan to keep a position because I don't know when this is going to take off and I don't want to be left behind completely if that time is now.

    In other words, your argument is quite logical and compelling to me, but your actions in shorting the stock are, in my view, incorrect. Good luck. I hope you are successful in timing your short trade. In future though, I suggest you invest more in tune with your name TMFUltraLong.

  • Report this Comment On August 09, 2013, at 12:54 PM, SteveTG3 wrote:

    Sean, there's quite a bit of useful data available on Tesla and it's target market.

    You do not have to do anything. You are free to act based on the investment opportunity you want to see. I'll simply say, you're probability of success will sky rocket if you choose to act on the investment opportunity the data presents rather than the one you want to see. That's no better nor worse an opportunity all the rest of us have. I wish you good luck in realizing your opportunities here and in life.

    Steve

  • Report this Comment On August 09, 2013, at 1:35 PM, RussellL wrote:

    heliskier wrote: It will only take one earnings disappointment to drop this sucker to 50 and that's still nose-bleed valuation. Now you understand how i made 20k yesterday and 100k after last earnings.

    So. I made more than double that holding TSLA for a year.

  • Report this Comment On August 09, 2013, at 2:07 PM, RussellL wrote:

    "In 2000 the Internet was going to revolutionize the retail industry. It wasn't until roughly 5 years later that this became a sustainable reality and many revenue growth stories went belly up."

    If you said that 1-2yrs ago about Tesla then there would be some truth to it, but not today.

    When did Tesla sell it's first car? 2008. That was 5 years ago.

    "Social media was all the rage in 2011 but Facebook had to lose more than half it's value over a year before it started to figure out that it didn't have all its ducks in a row."

    Tesla is way past that.

    "Near-field communications was supposed to transform how we pay 5 years ago... It's still largely in its infancy and the NFC related stocks have come back to earth."

    NFC is a technology that nobody has figured out how to monetize. The Model S is a product.

    The Model S won Car of the Year from Motor Trend and Automobile magazine. Consumer Reports rated it 99 out of 100 and crash tests with 5 stars.

    Has NFC received similar accolades?

  • Report this Comment On August 09, 2013, at 2:07 PM, RussellL wrote:

    "In 2000 the Internet was going to revolutionize the retail industry. It wasn't until roughly 5 years later that this became a sustainable reality and many revenue growth stories went belly up."

    If you said that 1-2yrs ago about Tesla then there would be some truth to it, but not today.

    When did Tesla sell it's first car? 2008. That was 5 years ago.

    "Social media was all the rage in 2011 but Facebook had to lose more than half it's value over a year before it started to figure out that it didn't have all its ducks in a row."

    Tesla is way past that.

    "Near-field communications was supposed to transform how we pay 5 years ago... It's still largely in its infancy and the NFC related stocks have come back to earth."

    NFC is a technology that nobody has figured out how to monetize. The Model S is a product.

    The Model S won Car of the Year from Motor Trend and Automobile magazine. Consumer Reports rated it 99 out of 100 and crash tests with 5 stars.

    Has NFC received similar accolades?

  • Report this Comment On August 09, 2013, at 3:16 PM, JulianCox wrote:

    @TMF

    "I understand your argument and see no reason why citizens wouldn't want to contribute to a cleaner environment. But, that didn't save the solar industry from rising then crashing"

    Firstly, customer's don't want to pay for a cleaner environment. That is the mistake made by all of the majors that produce little overpriced A-Class and Micro EVs. They win some of the innovators, not even the early adopters of the technology, and never the mainstream.

    What customers will do is take clean over dirty at the same price or better, and they will leap at cleaner, better and cheaper over all. That's Tesla Model S in the S Class segment, and funnily the value for money is also perceived by upgraders who would perhaps never before have bought an S-Class vehicle.

    Solar - I think that is a misconception, and the same is true throughout the energy sector. The problem with any of these things comes down to business models predicated on trying to monopolize (develop, patent and manufacture) some unique variant on any given technology. It killed A123 in the battery space too (very predictably).

    A solar business needs to be selling energy and an EV business needs to be selling cars. They need to own the customer relationship and be agnostic and require their suppliers of solar cells/panels and battery cells to keep innovating and competing for your business as a route to market. Both of these business types particularly the car manufacturer is relatively safe from a cell supplier cutting out the middle man. And going after the customer relationship with both the cell and a car to put it in. There will be some instances of solar manufacturers putting out installation teams, but these will not necessarily be as competitive even so, especially if the technology shifts to something else.

    Right now and for the foreseeable, SCTY, SPWR etc seem to be doing really well, better than any fossil fuel or utility stocks.

  • Report this Comment On August 10, 2013, at 3:23 PM, cmalek wrote:

    @heliskier:

    "It's a business that has to compete with the most sophisticated auto makers on the planet "

    How many "sophisticated" auto makers are we talking about? 10? 15? With all their technological sophistication and their multi-million, if not billion dollar R&D budgets combined they have not been able to produce a EV car that comes even close to Tesla's. The mighty GM, after years of R&D managed to give us the Volt, a piece of junk econobox that goes all of 40 miles between charges and costs close to $40k. In contrast Tesla Model S is a luxury car that goes 200 miles between charges and costs $70k. Do the math. Which car is a better value?

    "and they can move so much more quickly than TSLA can. "

    If you believe that, I have some ZZZZBest stock I can sell to you cheap. These companies you are so fond of are like giant supertankers that take tens of miles to turn or stop. It takes weeks for change orders to filter down from the CEO to the assembly line. Tesla, on the other hand, is like a family cabin cruiser. All the captain has to do is shout out the orders and everybody will hear him.

  • Report this Comment On August 10, 2013, at 3:26 PM, cmalek wrote:

    Sean:

    If you carefully cherry pick the proper numbers, you can prove anything. I bet if you tried, you could even prove that BRK.A and BRK.B are way overvalued and good candidates for a short.

  • Report this Comment On August 10, 2013, at 3:33 PM, cmalek wrote:

    @speculawyer:

    "it is impossible to build the $35K car with a 200 mile range"

    If you only build 1,000 cars, you may be right. But if you build 300,000 or 500,000 it is not only possible but very probable. It is called economy of scale. GM, F, TM, et al have been doing that for decades.

    "Tesla does not have any magic that the other automakers lack."

    Sure they do. Tesla has the technology that the other automakers lack. Give it a couple of years and the established automakers will be licensing that technology from Tesla just to not be left out of the EV bonanza.

  • Report this Comment On August 13, 2013, at 6:59 PM, SMFT wrote:

    Sean

    Congrats on having one of the most actively commented articles on the Fool. You can blog for me anytime.

    Does anyone here honestly believe that the entrenched industry giants - GM, BMW, Mercedes, Toyota, Ford, Volvo, Honda, etc - are going to sit on their hands?

    Also, do you REALLY believe that plug-n'-go cars are going to be the epitome of this move to non-internal-combustion vehicles?

    Y'all are going to get burned on Tesla. Sell it now, while the fools are still buying.....

  • Report this Comment On August 20, 2013, at 4:20 PM, johnluma wrote:

    So the lesson is clear. Don't buy the stock, buy the car.

  • Report this Comment On August 22, 2013, at 7:28 PM, 110254545yy wrote:

    LOL

    DID YOUR WOMAN LEAVE YOU YET?

    Too many IGNORANT PEOPLE writing for SEEKING ALPHA and MOTLEY FOOLS

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