Unpopular Opinion: Tesla's Worth Its Sky-High Valuation

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You can't turn on CNBC today, or open a newspaper without hearing about Tesla Motors (NASDAQ: TSLA  ) record quarterly results. The electric carmaker released its second-quarter earnings this week, which beat Wall Street estimates. Tesla's increased production and margins were most impressive, with record sales of 5,150 Model S cars, and a gross margin of 22% in the quarter.

However, to be fair, this 22% gross margin that Tesla CEO Elon Musk refers to in the shareholder letter is on a non-GAAP basis. That's because the 22% factors in revenue from the sale of pollution credits, which Tesla sold to other automakers in the quarter. Nevertheless, the company's quarterly results were remarkable, even when using generally accepted accounting principles. As a result, shares of Tesla are up nearly 15% today at about $153 apiece.

Investing in the future
The stock has almost quadrupled in value this year, so it's not surprising that most analysts believe the stock is too richly valued to buy at its current levels. Barclays jumped on the bandwagon today, downgrading the stock to a hold, noting that shares look fully valued at recent levels. However, I disagree.

True, at its current valuation, the stock has a market cap of $18 billion. That's about 25% of Ford's market value, when Tesla's total sales for the month of July amounted to just 1% of Ford's total sales in the same period, according to research from Autodata. While this example demonstrates Tesla's ever-climbing valuation, it also highlights a flaw in the way investors are analyzing the company.

Unlike Ford, Tesla only makes and sells fully electric vehicles, and it does so with much less economies of scale than Ford and other manufacturers today. Of course, this will change as Tesla ramps up production. However, one of the ways that Tesla has been able to succeed without being heavily reliant on economy of scale is through automation.

Tesla's cars are built almost entirely by robots capable of producing one car part every six seconds. While traditional automakers also use machines, Tesla is able to keep plant costs low by relying mostly on automated processes. For example, "Instead of investing in a fixed conveyor-line system to carry vehicles to different production stations, the Tesla factory uses automated carriers that follow a magnetic tape strip guiding them through the production process," a Bloomberg report explained.

Only 3,000 factory employees work at Tesla's Fremont, California plant. Yet, these automated processes allow a Model S to go from raw materials to being finished on the inspection line in about three to five days. The company also saves money by making parts onsite, whereas large-volume auto factories must outsource these functions to various suppliers.

Tesla's business model of selling direct to consumers is another factor that sets Tesla apart from traditional automakers. Together, these things make it difficult, in my opinion, to value Tesla using the same metrics you would big autos. Cult following, long term strategy, visionary leadership... these are things that can't be quantified. Yet, these are the very things that have carried Tesla from the most-shorted stock on the Nasdaq, to one of the best-performing companies in the S&P 500 this year.

Traditional automakers are even trying to mimic Tesla's success in the niche market of electrified driving. In fact, General Motors recently organized an internal team of GM employees to study Tesla and its disruptive impact on the industry, according to the Wall Street Journal.

Why Tesla still makes sense for long-term investors
Tesla has continued to speed ahead despite a lack of infrastructure for EVs in the U.S. The California-based company should gain even more momentum as it opens more Supercharging stations throughout the country in the years ahead. Additionally, Tesla is still in the early stages of opening retail stores both in the U.S. and internationally. In fact, the company delivered its first cars in Europe just this week.

Moreover, the EV maker could see outsized demand down the road as it begins expanding into Europe and Asia. As of its most recent quarter, Tesla operated 30 retail locations in North America, eight in Europe, and three in Asia. International markets offer a clear growth opportunity for Tesla going forward. Not only do I think Tesla will still be around in 10 years, but I also suspect its stock will continue to reward patient shareholders over that time. I've been a Tesla shareholder since 2011 when it traded around $27 a share, and I plan to hold on to shares for many more years to come.

Tesla is beginning to deliver cars in Asia, with plans to open its first store in China later this year. However, Tesla isn't the only automaker taking advantage of China's massive market.

China is already the world's largest auto market -- 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 -- just click here for instant access.

Read/Post Comments (6) | Recommend This Article (7)

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  • Report this Comment On August 09, 2013, at 8:41 PM, speculawyer wrote:

    Is Tesla worth its current price? Of course, that is what the market says. Do I agree? No. I think it is silly. The Model S is a great car and they have a future ahead of them. But if EVs catch on, there is nothing to stop all the other automakers from building their own EVs. There is no special magic or IP that Tesla owns that will block others from building great EVs too.

  • Report this Comment On August 09, 2013, at 9:06 PM, jamesdan567 wrote:

    There is a LOT of very special IP that Tesla owns. Over 100 patents granted and twice that applied for, many of which cover critical aspects of how an EV operates with its battery. Without doubt, there is also substantial trade secret information too.

    Tesla is the largest and most successful EV maker in the world. That's a foregone conclusion. They have exceptional management that's neither arrogant or egotistical.

    EV's are 300% to 400% more efficient, or more, than ICE cars. Therefore, all ICE cars will disappear, particularly as the gap grows larger due to better battery tech. and higher gas prices.

    Of course, many other companies will chase them, and many other auto companies will go bankrupt because of them.

    No other auto company in the world has access to the science and technology embedded in Space X. No Government or Corporation has ever made a reusable rocket that takes off and lands like the grasshopper. Tesla is unique and Tesla's products will lead the market for a very very long time.

    Most people do not understand the implications of disrupting the global transport system which easily absorbs $3.5 Trillion of funds each year, just on the new models and the energy. Add in the old models, the repairs, maintenance and etc. and its a $5 trillion annual beast. Tesla intends to cut that by 2/3's or more. Thats why Tesla is still a very undervalued investmetn

  • Report this Comment On August 09, 2013, at 9:10 PM, SteveTG3 wrote:

    speculawyer, even for casual observers, that argument has been largely eroded with BMW's release of the i3 (repeatedly reviewed as not hitting the mark as Tesla did), Audi's cancellation of their EV, and Infiniti's indefinite postponement of their's (i.e., we're not putting out an obviously inferior product).

    Indeed, there is IP and Tesla has at least a three year technical lead, and you can add on to those three years the time it would take any other automaker to overcome the perception that only Tesla gets EVs if they actually do catch up technologically. My sense is Tesla's lead will only expand- they are all in on EVs, the incumbents are kicking the can down the road with a some hybrids and plugin hybrids to appear proactive.

  • Report this Comment On August 10, 2013, at 9:14 AM, cottagetrees wrote:

    What SteveTG3 said. Tesla has a shot at becoming one of the world's largest most profitable automakers. Imagine them selling 1/2 million vehicles a year at 25% margin in a few short years, without the encumberance of a dealer network. You know Elon won't be satisfied there. There are over 1 billion cars on the road today, a great percentage of which may be replaced by EVs in the next decade. Every automaker should license Tesla's tech.

  • Report this Comment On August 10, 2013, at 9:56 PM, spongeLarry wrote:

    Go to Wikipedia and find "General Motors EV1" and this will tell you why the big automakers won't compete with Tesla. GM had a wildly successful EV - too successful - it was going to work and GM + big oil didn't like that so they took them back from the leasee's and crushed them all, hoping everyone would just forget about it.

    Not much has changed since then. The big automakers are still dragging their feet on EV's: they release hybrids that dont plug in, claiming "you dont have to plug it in" when it really is "you're not allowed to plug it in". Then later, under pressure, they finally release plugin hybrids, while better, still can't go very far on EV power only, and are not fun to drive at all. The very few examples of EV-only vehicles are now better, but still very lacking in range and only available as a lease and/or only in certain states. Note that BMW's EV is only announced, it is not yet available. You think this knuckle-dragging, oil sucking mentality can compete with Tesla?

    Also, Tesla is not in the S&P 500 yet; you're getting ahead of yourself.

  • Report this Comment On August 11, 2013, at 2:31 AM, strelna wrote:

    I do not find valuation discussions without figures very useful!

    TSLA is factory-efficient, has an advantage in direct-selling and the massive international potential is yet to unfold. It has a charismatic leader. The story is eco-romantic. It is hugely successful. Momentum is extraordinary.

    All understood. So is the rather obvious fact that the future is difficult to discern. Now some numbers please. Is the stock still in the ballpark of reality? (Let's make it a really big ballpark.)

    The 'greater fool theory' is not attractive to me! The question on the table is: will/can the future cash flows make the current price look cheap?

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