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Tesla Is Overvalued -- But You Shouldn't Sell

A rise in Tesla Motors' (NASDAQ: TSLA  ) stock price now seems almost like an expected daily occurrence. Though the company is certainly firing on all cylinders, is this gain getting out of hand? Maybe. But that doesn't mean it's time to sell.

Huge expectations
Tesla plans to sell 21,000 fully electric Model S vehicles this year. Next year, it plans to sell 40,000. Ambitious, right? Not when these plans are viewed in the context of the company's valuation.

In order for Tesla's current valuation to make sense, it will have to reach annual sales of about 500,000 vehicles. According to some conservative estimates, Tesla could earn $880 million per year in operating income at this level. This would put Tesla, at today's market capitalization, at about 23 times operating income -- still expensive, but at least reasonable.

Sure, Tesla Motors looks poised for an awesome future. What's more, the company's heavy investment in supercharger stations helps make CEO Elon Musk's huge ambitions seem more realistic. And, most importantly, the management team has proven it can execute.

When it's all said and done, Tesla is the type of company many investors like to hold in their portfolio. But price matters -- and the higher the stock soars, the further we venture into speculative territory. At today's price, the expectations for Tesla are simply enormous.

What should investors do?
If Tesla Motors really is officially in speculative territory, does that mean it's time to sell? Not necessarily.

Investors with a Foolishly long-term time horizon can use time as a tool to help them invest better. Unlike the Street, there's no reason for individual investors to be in a hurry.

Investing with the intention of holding for the long haul allows investors to invest less like traders and more like business owners. It empowers them to be less concerned with the short-term market gyrations that are, for the most part, completely unpredictable. Sure, history tells us that a growth stock with a lofty valuation (like Tesla) will likely have a very volatile ride. But a long-term time horizon allows investors to forget about that and look at the underlying business.

Fundamentally, Tesla Motors is mostly exceeding the Street's expectations. The company's revenue is soaring, and its gross profit margins continue their impressive climb.

With supply limited, Tesla is selling every Model S it can make. As the company expands internationally and ramps up competition, sales should continue to soar.

In other words, Tesla as a business seems to be doing exceptionally well. Sure, investors expect this. But with the company going above and beyond what the Street expected, there's no reason to sell this stock.

Tesla isn't a buy, but it isn't a sell, either. As long as the company continues to deliver exceptional results, I'm in for the long haul.

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Read/Post Comments (21) | Recommend This Article (22)

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 28, 2013, at 8:30 PM, CrazyDocAl wrote:

    Musk has said that the stock is over valued and is warning that it could be a roller coaster ride. When the CEO says that his company stock is overpriced it's because he's worried that the coming fall could damage the company to the point where it folds.

  • Report this Comment On August 28, 2013, at 11:22 PM, DrGoldin wrote:

    Well ... if it falls, I'm in.

  • Report this Comment On August 29, 2013, at 9:23 AM, Jason87467 wrote:

    A lot of fools will loose lots of money when the Tesla overpriced stock come crashing down. An auto stock is not like a high tech piece of firmware or software. Cars are mostly mechanical and are subjected to much mechanical changes which can be very costly.

    The Tesla competitors will see to it that Tesla never gets the upper hand, especially after Elon Musk ridicule the other competitors.

  • Report this Comment On August 29, 2013, at 10:55 AM, gskinner75006 wrote:

    When valuations are too high and the traders are running up the stock price, the prudent move would be to take some of the profit off the table.

  • Report this Comment On August 29, 2013, at 11:42 AM, rianjones1983 wrote:

    There are plenty of car companies in the world, there's not really a need for a new car company or another gasoline car company said by Elon Musk at Teslive 2013 @

  • Report this Comment On August 29, 2013, at 1:13 PM, HectorLemans wrote:

    When Netflix crashed from $300 to $70 in a few months and stayed there for a year, were you able to hang on? If not, I suggest you call it a day, sell Tesla, and look for greener pasture (i.e. undervalued stocks).

  • Report this Comment On August 29, 2013, at 5:54 PM, topbeancounter wrote:

    Anyone buying this one truly fits the Fools Rules. That's just nuts attempting to justify the value once production reach 40 times where it is today. Even the feds won't attempt to justify this form of logic...

  • Report this Comment On August 29, 2013, at 5:57 PM, aljahbar wrote:

    Warranties, Recalls, 401-K plans, payroll, labor disputes, inventory, supply contract negotiations....Ah the life of an auto manufacturer.

    Assets less liabilities / Common stock = $5

    **sarcasm on** Oh and we have had a whole single Q that's turned a profit in 10 years..yeah that's worth $160 + a share.*sarcasm off*

  • Report this Comment On August 29, 2013, at 6:07 PM, kingfish100 wrote:

    There really seems to be a group here mostly of non Tesla investors who really wish they'd have had the faith but now finally feel it's their time to ridicule those of us who have made $millions on this stock. We didn't make this money and more to come on Tesla by not having the courage to leave the shore. Tesla is blazing paths never seen before, they are different. The longer you wait the less you will participate!!

  • Report this Comment On August 29, 2013, at 6:42 PM, LazyOldMan wrote:

    Interesting story. Tesla went over $171 the other day which was my sell point, I was out of town and didn't sell. It is $165 now, do I sell or wait for the next hot day. It doesn't matter it has been a wonderful investment. And, several months or a year from now it will be again. People buy Google and Amazon at crazy ratios... I rode Apple from $78 a share and I see some similarities in the way people treat this stock, too. Tesla has an incredible moat... but the market is insane and based on past experience if you get 50% or better gain it is worth taking the gain and looking for the next best opportunity. Something will happen and Mr. Market will crash creating an opportunity to buy Tesla at a discount. I'll probably sell pretty soon and smile all the way to the bank. Thanks Elon, good job.

  • Report this Comment On August 29, 2013, at 6:42 PM, CyclingCowboy wrote:

    Most of you are missing the wildcard in this. What if Elon Suddenly develops a battery that has a 500 miles range. I would not put this passed him. He is a wiley and smart character. My bets are on him and his car.

  • Report this Comment On August 29, 2013, at 7:09 PM, Poleet wrote:

    Those of you who shorted TSLA hardly have the standing to criticize those of us who have had returns in the 70% range, and higher.

    If you disagree, that is fine, but use an actual argument, instead of calling the guy who is making more money than you an idiot.

    Try and understand this: I didn't do anything wrong as long as I make money. A profit from a ZEV credit or from selling widgets is still a profit, and I am not the once confused in this regard, and neither was Mr. Market, which reacted accordingly. Yes, the stock is expensive, but that doesn't seem to have stopped it from making me money.

  • Report this Comment On August 29, 2013, at 7:23 PM, larchmont1 wrote:

    Daniel says, "Tesla isn't a buy, but it isn't a sell, either." I have never understood the "Hold" rating. Every stock is either a Buy or a Sell.

    If one says the stock of a company is overvalued, that means the price is too high relative to one's expectation of future cash flow available to sharehoders, i.e. there is no expectation that cash flow will grow to justify the current price.

    If I am holding an overvalued stock, it is not house money, it is my money with the click of a mouse. If the stock that I hold is overvalued, the market has given me a gift. I should click the mouse to sell and redeploy the proceeds into fairly valued or undervalued stocks.

    I do not know if Tesla is overvalued, because I have not analyzed its stock price relative to my expectations of future cash flow and relative to other investment options. I do know, however, that if I did do the analysis, I would arrive at one of two conclusions:

    1) I don't own enough of the stock given my resources and I should Buy; or

    2) I own the stock and should sell and redeploy the proceeds; or I don't own the stock and I should not buy at the current price.

  • Report this Comment On August 29, 2013, at 9:27 PM, EducatedGuesser wrote:

    Bought in at 55 sold out at 165. I am taking my profits off the table and may buy back in if the price drops some prior to the next earnings release.

  • Report this Comment On August 30, 2013, at 6:20 AM, shineyrlight wrote:

    What makes the Tesla Batteries so exceptional? No other EV comes even close. Will the batteries not be degradated by the quick charging?

  • Report this Comment On August 30, 2013, at 8:39 AM, cmalek wrote:

    The market is moved by traders, speculators and arbs, not by investors. When Warren Buffet buys couple million shares of a stock its price does not shoot up by an insane percentage. When day traders and speculators start trading a stock based on vague rumors, that stock's price is all over the map.

    Yes, TSLA stock is overvalued because it has been bid up by the speculators, traders and arbs. However, the underlying company is basically sound. So, for now, I will short the stock. When the price falls into the $60-$70 range I will buy all I can afford. By that time the speculators would have moved on to another stock du jour. If the stock price doesn't come down, the price of the TSLA car will so I will buy thcar instead of the stock.

  • Report this Comment On August 30, 2013, at 10:37 AM, mikecart1 wrote:

    I will reveal the future:

    1) TSLA will continue going between $150-170/share until news of war, the company, or a low earnings quarter.

    2) At the time #1 occurs, the so-called 'experts' on TV and around the internet will bash TSLA saying it was overpriced.

    3) TSLA will drop below $100/share again only for the same people that wished to buy it but said $160 is too expensive are now not to be found.

    4) The cycle will repeat again when TSLA slowly goes back up to $150+ and the ones that said $100 is too much still will now wish for it to happen again.


  • Report this Comment On August 30, 2013, at 12:20 PM, Loevendal wrote:

    One should not blindly buy stocks, and totally ignore the various ratios, which for some companies can be very high, as is the case in Tesla. It is always easy to come up with a niche product, and start to grow exponentially in the first year, but this growth will not be possible to maintain for many years for a company like Tesla, as Tesla is not alone in car market. Just look at the renewable energy sector. The companies who were involved in the start-up, also grew exponentially and ratios were also high, but more and more competitors came, which supply at a time of increased demand and prices for both solar cells as wind turbines fell sharply in price, which increased earnings subsequently fell and in writing, earnings not stopped falling. The price of the companies' shares also plummeted in recent years.

    And to compare Tesla with Google and Amazon, is not a comparison can be made, as their market conditions to grow is quite another.

  • Report this Comment On August 30, 2013, at 12:34 PM, MartyTheCanuck wrote:

    Geez, I tought it would quadrupled every 8 months. I guess I should sell and buy a Tesla car with my profit. How many shorts can do that ?

  • Report this Comment On August 30, 2013, at 2:30 PM, brittlerock wrote:

    OK, first clue: "firing on all cylinders". When a commentator says that about Tesla, be careful. Next clue: "In order for Tesla's current valuation to make sense, it will have to reach annual sales of about 500,000 vehicles." I'm not saying it can't be done, but that's a far cry from 40,000 vehicles, the current sales target (about twice current production". Another clue: "At today's price, the expectations for Tesla are simply enormous."

    Look, I'm all for long-term buy and hold great companies. But at some point foolishly long-term time horizons simply become foolish. Tesla has exactly one technological advantage - the battery. Does anyone think that there's nobody as smart as Mr. Musk who might be able to build a competitive product. Technology has a surprisingly short half-life. If your long-term investment is going to take 10 years or more to be worth today's price, I think you're better off to take your profits and find a cheaper opportunity to invest in.

    One might ask the question, "What is the long-term future for the personal automobile? Maybe not so bright? Even if it's all electric, look at the state of the infrastructure. Our roads and bridges are crumbling and there's precious little political will to rebuild them - That takes taxes. No politician is willing to raise taxes.

  • Report this Comment On September 01, 2013, at 10:00 PM, lowmaple wrote:

    brittlerock Buy a 4by4 Tesla.

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