Investors Knock Tesla Motors Inc. Stock Off Its Recent High. Is It Time to Buy?

Investors kicked off the week by pushing shares of Tesla Motors (NASDAQ: TSLA  ) lower by more than 2% on Monday. The sell-off was surprising, given news that the electric-car maker recently reached a deal with officials in New York that would allow Tesla to continue selling its zero-emission vehicles, or ZEVs, in the state. Tesla currently operates five retail locations in the Empire State.

This decision is particularly encouraging, considering the company's recent upset in New Jersey.

Source: Tesla Motors.

Tesla Motors was blocked from selling its cars directly to consumers in New Jersey last month after Gov. Chris Christie's administration unanimously voted to ban direct auto sales in the Garden State. Therefore, New York's decision to buck this trend is certainly a win for the upstart automaker. As of now, Tesla will be allowed to keep its five existing stores in New York -- though there are restrictions in place that may prohibit Tesla from opening additional company-owned retail outlets in the future. 

With the stock now trading around $209 a share, down from a high of $260 earlier last month, many investors are wondering whether this creates an opportunity to get in on the action.

Factoring risk into the equation
Tesla continues to grow its revenue and reduce its reliance on ZEV credits. In its fiscal 2013 fourth quarter, Tesla pulled in $615 million in revenue -- nearly double that of the same period a year earlier. Additionally, the EV maker generated an automotive gross margin of 25% in the fourth quarter without the help of ZEV credit revenue. 

Meanwhile, the company's full-year performance was even more encouraging. Tesla delivered a record 22,477 Model S cars last year, which translated into more than $2 billion in annual sales, or about five times the company's fiscal 2012 revenue.

These are all good signs for the stock going forward. However, ballooning revenue growth doesn't necessarily make Tesla less risky from an investment standpoint.

The company, after all, faces new challenges with the planned build-out of its multibillion-dollar Gigafactory. This so-called Gigafactory would enable the automaker to manufacture lithium-ion batteries in bulk and thus lower the cost of its battery packs by as much as 30%. Tesla said it would directly invest $2 billion in the project, with the remaining funds coming from strategic partners, such as Panasonic.

Source: Tesla Motors.

Yet a recent report says that Panasonic isn't fully committed to the cause. Panasonic's president, Kazuhiro Tsuga, told Bloomberg: "Elon plans to produce more affordable models besides Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger." 

Not having the proper support -- along with other risks -- could hamper Tesla's growth. Moreover, without a Gigafactory, Tesla may fall short of its goal to create a more affordable mass market EV by 2017.

All things considered, the bottom line is this: If you invest in shares of Tesla today, you're paying now for future revenue growth that could be five to 10 years out. That's OK for patient investors, but you need to have a long time horizon for the risk-reward balance to make sense at the stock's current valuation. I think the best strategy for interested investors would be to focus on allocating a small portion of their total portfolio to a growth stock like Tesla because of the large risk associated with it. By dividing a portfolio up among different assets, an investor can potentially lower his or her investment risk.

Dollar-cost averaging, or investing a set amount of cash into Tesla over the long haul, is another smart approach as long as the business fundamentals are intact. In general, this is a winning strategy, because investing a fixed amount of money in the stock market on a regular basis allows an investor to buy more shares when prices are low and fewer shares when prices are high. Over the long run, this can provide a safe haven from the ebb and flow of the market. Ultimately, this method should help offset the volatility in shares of Tesla.

Despite the recent pullback in shares of Tesla, the stock is still up more than 41% so far this year. Moreover, the stock continues to look expensive with a price-to-sales ratio of 12.99, which is significantly higher than the industry average of 0.8. Put another way, Tesla investors are paying roughly $12.99 for $1 of sales today. Ultimately, this tells us that Mr. Market has lofty expectations for Tesla's future revenue growth. For this reason, investors may be better served by high-growth stocks other than Tesla, at least at its current valuation.

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

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 April 01, 2014, at 6:45 PM, FrankoJames wrote:

    Tamara "Walsh" Rutter,

    That all depends if the CIA is smart enough to steal all of the FoolCoins and BitCoins and then sell those currencies at Eco-Coin ATMs and then use the new funds to pump up TSLA stock price over the short-term. The members of latter two groups could then focus on winning an election in Poland. Enjoy your cars. This is my last POST with this account.

    Fool on,

    Sammy Buffett

  • Report this Comment On April 01, 2014, at 6:56 PM, Ustauber wrote:

    Thank god Sammy

  • Report this Comment On April 01, 2014, at 7:06 PM, Ustauber wrote:

    Tamara,

    If you think Tesla is over priced what about Chipotle, Netflix, amazon, bitcoin and Plug just a few to mentioned.

    You will need a Chipotle in every single street in the USA , Netflix to have service on every single household , Plug on every single EV and lets don't mentioned Bitcoin .

  • Report this Comment On April 01, 2014, at 7:15 PM, Ustauber wrote:

    Tamara,

    Why you did not post my last comment ?

  • Report this Comment On April 01, 2014, at 7:44 PM, drax7 wrote:

    You Tamara and Andrea James have been the best analyst when it comes to tesla, and now you introduce this diversification bs, please. Keep the faith, this is Elon you are betting on the last great hope .

  • Report this Comment On April 02, 2014, at 10:30 AM, Ustauber wrote:

    Thx tsla

  • Report this Comment On April 04, 2014, at 10:14 AM, melissabrittany wrote:

    Exactly, the stock price of Tesla is up more than 53% year to date which is an unbelievable percentage. Their revenues are more than double in this quarter as compared to the same quarter last year. This really shows that their cars are selling like a piece of cake!

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