Is Tesla Now Cheap Enough for Value Investors?

Electric car innovator Tesla Motors (NASDAQ: TSLA  ) 's stock has been sliding in recent days, with the decline kicked off by news that its growth, while strong, isn't turning out to be strong enough. Call it supply-chain difficulties, growing pains, or simply the market's impatience, but Tesla is simply facing the same uncertain future as every other company. Its stock, once priced as though Tesla could do no wrong, is simply adjusting to the reality that imperfections happen.

In the long run, every company -- including Tesla -- is valued based on its ability to generate cold, hard cash -- either through its operations or through the potential liquidation of its assets. The key factors that go into turning those cash flows into a market price are the size, the timing, and the likelihood of those cash flows actually happening.

The more cash a company can generate, and the sooner it can generate it, the more the company is worth. In addition, the more certainty behind the potential for those cash flows, the more they're worth today.

Nobody can predict the future
In truth, Tesla hasn't yet shown itself capable of sustainably delivering profits. For a capital-intensive business that's still fairly early in its life cycle, that's a fairly acceptable position. Some of its problems seem to be supply-chain-driven, suggesting that it will need to continue to invest significant additional capital to continue to grow quickly.

From the backward-looking lens of its earnings reports, in its strongest quarter to date, Tesla was able to generate around $102 million in cash from operations. In that same quarter, it spent roughly $76 million in capital to help boost its operating capacity. The $102 million in operating cash is awesome, but if it'll need to keep spending that cash to sustain its expansion, it'll end up generating very little net cash today.

Say it manages to keep $25 million-$30 million per quarter, or around $100 to $120 million in annual free cash flow generating capacity. Even after the recent slide, Tesla's current market capitalization of around $16.4 billion exceeds a generous measure of the company's demonstrated free cash flow-generating abilities by more than a hundredfold.

Sure, you can make the case that at some point, the expansion capital spending can slow down, and that at some point, the company can grow to where it will generate significantly more operating cash. There are many reasons to believe that Tesla will grow and will very likely prosper in the future. But how much will it prosper -- and when will it reach that point?

Nobody really knows. But the market is waking up to the reality that it will take significant continued investment for Tesla to keep growing rapidly. That pushes back the timing of the company's ability to produce prodigious amounts of free cash, and it increases the capital at risk in investments that may not pay out as expected. And that, in turn, reduces the certainty that those cash flows will be generated.

Still priced for a very strong future
Even after its recent drop, Tesla's market capitalization suggests that the market still expects a very strong future for the company. It's just not quite as certain or quick as the market had previously thought.

As a value investor, I see the potential benefits from Tesla's future growth opportunities. I can also build a spreadsheet model that justifies its current price if everything goes well for the company going forward. However, I can't come up with a high enough level of certainty that the rosy future from that spreadsheet model will come true to justify investing my own cash in the company right now.

As Warren Buffett has said about investing, "In this game, the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch." Tesla's stock, though down from its highs, isn't trading anywhere near low enough to be a "fat pitch." Tesla certainly has a great potential for a strong future in front of it, but it still needs to prove itself capable of generating all that cash the market is expecting of it.


Read/Post Comments (15) | Recommend This Article (5)

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 November 08, 2013, at 1:29 PM, MarcelinoM1 wrote:

    The Tesla stock has been sliding just as indicated by the speculation of the Johnson's and others. Investors annalysts ;-). The value that any stock has or has had is directly associated on how the mass views the company and the like or not like of it. Just see anyone driving a Tesla around and you would see American pride back in the saddle. Sure it has gone down. All stocks are unpredictable in short term what matters is the long term. See a good company and say so... It is hard to swim against the oil current, so deaf ears should apply best at this time...

    But everyone is out there to make a fast buck and goes up and down with the tale "the sky is falling"

    Even making statements about batteries, I wonder if they know the technology to even utter comments like that... They should at least bring an external party and write a paper on the technology to be able to comment on the paper, not directly on the technology applied or not applied or its safety. The rest are just opinions just like mine...MMP

  • Report this Comment On November 08, 2013, at 3:09 PM, leradron wrote:

    The biggest problem I see when discussing TSLA is that people conclusion that TSLA is a good buy because they have a great company and a great car. Those people need to realize it's the stock valuation that is the problem, not the company. Who cares if TSLA is a 20B car company if it takes them 20 years to get there? Do you really want to sit on that valuation?

  • Report this Comment On November 08, 2013, at 6:41 PM, user5701 wrote:

    "However, I can't come up with a high enough level of certainty that the rosy future from that spreadsheet model will come true to justify investing my own cash in the company right now."

    I really dislike how TMF continues to contradict itself. Chuck, Tom believes the opposite. Which one of you should I listen to?

  • Report this Comment On November 08, 2013, at 6:58 PM, GoldenGrrls wrote:

    Tesla's growth "while strong, isn't turning out to be strong enough."

    Wow, it's true - "only two forces drive the stock market: greed and fear"!!

    Strong growth isn't good enough?? Who are these people, day traders? Strong growth is good enough for me, but I'm trying to be very Foolish!

  • Report this Comment On November 08, 2013, at 7:15 PM, TMFBigFrog wrote:

    Hi user5701,

    The "Motley" in the company's name refers to the fact that we as individual investors have the ability to come to different conclusions about any given company's stock than any other Fool, including the ones that are in leadership positions within the company.

    Indeed, rather than "believe" me or Tom, you may find yourself in a much stronger position as an investor if you add your own perspective to what you learn from either one of us and your own research on the company, its prospects, and its fundamentals.

    In the end, the stock market is a market of stocks. You can buy any given stock because there's someone on the other end of the transaction willing to sell it to you, or you can sell any given stock because there's someone on the other end of the transaction willing to buy it from you.

    From that perspective, differences of opinion are precisely what make the market work, and some of the world's best investors have gotten that way because they consider what the investor on the other side of the transaction is thinking and wonder whether that person is right....

    Best regards,

    -Chuck

    Inside Value Home Fool

  • Report this Comment On November 09, 2013, at 12:01 AM, Kryptyk wrote:

    I don't understand how one could use the term value investor in the same sentence with Tesla. It's reasonable to ask whether it's cheap enough to buy, but "value stock", come on. I don't see Warren Buffett bellying up to the bar just yet.

  • Report this Comment On November 09, 2013, at 9:49 AM, cmalek wrote:

    "The "Motley" in the company's name refers to the fact that we as individual investors have the ability to come to different conclusions about any given company's stock than any other Fool, including the ones that are in leadership positions within the company."

    If that is true then you guys are no different than Wall Street pundits. How can two analysts look at the same numbers and come up with completely opposite outlooks for the same company? Maybe they both should use tea leaves to divine the future instead of one using goat entrails and the other using astrology.

  • Report this Comment On November 09, 2013, at 11:45 AM, duuude1 wrote:

    user5701 and cmalek,

    Are you guys nuts? How long have you been with TMF? Have you used and followed any TMF investment newsletters and tried to learn and change how you invest? Key: "learn" and "change".

    The funny thing is, as you learn and change and improve how you invest financially, you actually are *investing* in yourself as you discover how to get better in anything by active professional disagreement among peers.

    So shape up and quit asking for easy answers on "what stock should I buy". There are no shortcuts here - learn and change.

    Duuude1

  • Report this Comment On November 09, 2013, at 12:17 PM, duuude1 wrote:

    user5701 and cmalek,

    Are you guys nuts? How long have you been with TMF? Have you used and followed any TMF investment newsletters and tried to learn and change how you invest? Key: "learn" and "change".

    The funny thing is, as you learn and change and improve how you invest financially, you actually are *investing* in yourself as you discover how to get better in anything by active professional disagreement among peers.

    So shape up and quit asking for easy answers on "what stock should I buy". There are no shortcuts here - learn and change.

    Duuude1

  • Report this Comment On November 09, 2013, at 1:39 PM, TMFBigFrog wrote:

    Hi cmalek,

    Companies are valued based on the expectations for their futures. The past numbers in the financial statements are guideposts, but they can't tell you with certainty what's coming next.

    Nobody really knows what's coming next, and a company's market price merely reflects the most recent "best guess" of a future that won't be known until it actually unfolds. Almost ironically, by the time that future does become known, it's generally too late to profit from it, as the company would be valued based on its new future from that point.

    Two analysts can look at the same numbers and come up with different conclusions precisely because what we're doing is making educated projections with the best available information we have. It's the same reason why there's a stock sold every time there's one bought...

    Best regards,

    -Chuck

    Inside Value Home Fool

  • Report this Comment On November 11, 2013, at 11:19 AM, ffbj wrote:

    Sometimes I wonder why so many people are talking about Tesla. Here is my analysis analogy with a partially fictitious facts. Man O' War has now won 10 races in a row and racing fever sweeps the nation. Everyone is glued to the radio for his latest race. In his very next outing Man O' War stumbles out of the gate and loses. In fact he loses his next three races and everyone says he is finished. Btw journalistic license often includes spectacular headlines, or shades of gray when it comes to complete accuracy of the aforesaid headline statements. Why quibble about whether it is a value stock or just a value? I don't think it is one and it is perhaps the other.

    Well, back to Man O' War aka Tesla: They have stumbled and their stock has taken a hit.

    That is about it. Sure they can recover and win a few more races, but the time to bet on them was when they were unstoppable on the way up, not now imo. You missed it!

  • Report this Comment On November 11, 2013, at 7:59 PM, duuude1 wrote:

    AMZN

    May 1997 = $1.50

    Apr 1999 = $86.03

    Jul 1999 = $50.03

    Is AMZN done? Did you miss it? Where is AMZN now...

    Nov 2013 = $350.31

    If you bought at the peak at $86.03 and rode out the remaining profitless decade+, you'd be up more than four-fold your investment. How often does that happen?

    NFLX

    Jun 2002 = $7.83

    Feb 2004 = $38.75

    Apr 2004 = $25.36

    Is NFLX done? Did you miss it? Where is NFLX now...

    Nov 2013 = $337.91

    If you bought at the peak of $38.75 and rode out the remaining competition-filled decade, you'd be up almost ten-fold. How often does that happen?

    TSLA

    ....

    You fill in the details from here...

    Duuude1

  • Report this Comment On November 12, 2013, at 3:05 PM, ffbj wrote:

    Having a thesis and then finding individual stocks that fit that thesis, and using those examples as proof of your thesis, is some sort of logical fallacy.

    In more simple terms you are wrong.

  • Report this Comment On November 13, 2013, at 8:39 PM, duuude1 wrote:

    ffbj, those are called examples.

    An example is a case that demonstrates that a statement like the one you made: "you missed it" is wrong.

    The examples show that early in a transformational company's life, stock gains can be shocking; and that early losses can also be shocking, leading to people like you saying that the game is over.

    And the examples further show that transformational companies like AMZN and NFLX (and TSLA) can rocket to wealth-making status.

    Duuude1

  • Report this Comment On November 18, 2013, at 2:04 PM, ffbj wrote:

    Ecological fallacy – inferences about the nature of specific individuals are based solely upon aggregate statistics collected for the group to which those individuals belong.[21]

Add your comment.

DocumentId: 2719167, ~/Articles/ArticleHandler.aspx, 4/17/2014 3:04:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement