4 Reasons You Should Wait to Buy Tesla Motors Inc.

Sometimes Tesla Motors (NASDAQ: TSLA  ) (NASDAQ: TSLA  ) (NASDAQ: TSLA  )  stock looks more like a roller coaster than a car. Investors along for the ride have seen Tesla trade between $45 and $265 during the past year, and I'm wondering if the track is heading down hill.

Price trends are one thing, but even CEO Elon Musk conceded that the "stock price that [Tesla has] is more than we have any right to deserve." Musk made that comment last October when shares traded near $170. While Tesla's potential to captivate a growing industry continually romances the market, remember to put on your seatbelt.

Rapid growth
Although an increase in sales is typically a positive indication for a company's future, it may not be in the case of Tesla. In 2012-2013, sales grew an astounding 387%, while assets, only climbed 117%. This is a point of concern.

If Tesla's sales develop too quickly then it may have trouble securing the assets necessary to accommodate such growth. Assuming that electric vehicles, or EV, continue to gain popularity in the automobile industry, Tesla could bleed market share to competitors if it does not find a way to develop its assets.

Divergent market strategy
Demand in the electric-car segment is expected to grow at an annual rate of 7% until 2020. . As a result, the competition is increasing.

A focus on fuel economy, government required low-emissions, and decreasing operational costs for electric-car makers brought many big names to the arena, dividing the market into several niche categories.

The first is affordability. General Motors'  (NYSE: GM  )  Chevrolet has two models, the Volt and the Spark, priced at $27,000 and $12,000, respectively . Both have been disappointments.

GM sold 23,094 Volts in 2013, down from 2012. Further, only 589 Sparks sold during the seven months it was on the market. (It's worth noting that overall U.S. car sales were up about 8% in 2013.)  Also on the market, Toyota's plug-in Prius comes in slightly lower at $30,000and Kia is coming out with its electric Soul later this year.

The second is luxury. Mercedes' B-class and BMW's i3 sell style and elegance to those willing to foot the higher price tag.

The third is sport. In this niche, Tesla stands alone. Tesla was born in a garage, grew up on the track, and lives in the winner's circle. Its Roadster was the first electric supercar, and the Model S boasts a blistering zero to 60 mph acceleration of 4.2 seconds.

However, there is a problem: I think that Tesla's plan to position its Gen III model into a lower pricing bracket (around $40,000) will create brand confusion.

Creating an "affordable" Tesla is like the K900 "luxury" Kia. It just doesn't make any sense. I would prefer to see Tesla create a new brand to sell its lower-end cars, much like Toyota sells Lexus to its high-end users and Toyota to its middle and lower-end users.  

Cyclical industry
The economy is not immune to recession, and it's almost a guarantee one will be experienced again. Cyclical products such as cars will likely experience growth problems, especially those companies with a high degree of operating leverage (where each additional product sale contributes a greater portion toward gross margin).

Automakers need to address these growth issues. . Tesla's plan to build its Gigafactory and expand its number of Supercharger stations is contingent on demand.

Musk reports that the new factory will produce 500,000 cars per year by 2020, reducing the cost of its 60-kilowatt-hour battery pack by 30%. Any hiccup in the market or decrease in demand could be disastrous for Tesla's future.

A turn for the worse would leave Tesla sitting on a $5 billion facility, making batteries that no one wants. Long-term investors should be wary of such a risk.

Overvalued, in my opinion
The value of Tesla's stock is fueled by kerosene. It burns hot, but for how long? Currently, Tesla is trading at 12 times last year's sales. If Tesla were to have a (very high) 10% profit margin yielding $200 million (profits are currently negative), the P/E multiple would then be 122.

Aswath Damodaran, professor of finance at NYU's Stern School of Business, has a simple view regarding the value of Tesla: any reasonable valuation metric yields an overvaluation. This past year, Tesla reached a market capitalization of $22 billion and sold roughly 25,000 cars.  So each car Tesla produced in 2013 was worth about $900,000.    Also, shareholders swallowed a negative 25% return on equity for their investment. Considering these and many other calculations, Tesla should be valued at much lower than it is currently. Yet, investors keep saying, "Yes."  

The future of Tesla
Tesla is a good buy, just not at current prices. The success of Tesla depends largely on its ability to develop its assets and the accuracy of its growth forecasts. Further, if Tesla can secure its location and finances for the Gigafactory and reach projected production capacity, it will be well on its way to justifying its valuation.

For the time being, Tesla's future remains highly uncertain. If you're long, sit back and hold on tight.

You don't want to miss this
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Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On May 24, 2014, at 3:35 PM, london1958 wrote:

    Here's 1 good reason TO BUY NOW! The price and volatility allow getting in and out with profits.

    I've made about $6000.00 buying back and riding up...over the last 4 months.....and it's not over yet!

  • Report this Comment On May 24, 2014, at 3:52 PM, SteveTG3 wrote:

    this article is a list of errant nonsense.

    -Yes, in October 2013 , Musk made that comment, but a couple of months later when the stock was back at $170 he said he now thought it was a fair valuation. It's been over 6 months since then and the company has executed very well on several key fronts, and seen increasing demand.

    - Citing Damodaran? After raising his valuation from $67 to about $130 on his last blog March, a commentator pointed out he was vastly overestimated the capital Tesla will need in the next 10 years, dramatically skewing his valuation. The professor acknowledged that the commentator had more background on Tesla than himself, and that he (Damodaran) needed to go back and rethink his assumptions.

    - Demand for the Gen III a question mark? Hmm... a car with a Toyota Camry's cost of ownership that performs like a BMW 3 series, is good for the environment, and keeps us out of dependence on nations we've had a hard time getting along with? Do you really think 150,000 of these wouldn't find a market in each North America, Europe and Asia... with the Model S and X, that would put demand over 500K. I think demand will be several times this.

  • Report this Comment On May 24, 2014, at 5:37 PM, deeageaux wrote:

    Brand confusion?

    BMW and MB comfortably sell cars in the $30k-$130k range under their namesake brands.

    Sub $30k cars might need a new value brand so as not to dilute Tesla brand like MIni or Smart. But that is a concern for much later into the future.

    Lexus also sells cars in the $30k-$100k range and even a limited edition supercar for $350k.

    Tesla's new facility will make batteries and battery packs not cars. These battery packs can also be used for home/commercial solar energy storage and also in industrial applications to manage peak electricity demand/pricing. California has a mandate for energy storage for industrial companies looming to prevent brownouts since California is not willing to go a natural gas/nuclear power plant building spree.

    Tesla's 3rd generation car will offer 80% of benefits at 50% of the cost of the Model S. That the new Gigafactory will sit idle waiting for customers borders on lunacy.

  • Report this Comment On May 24, 2014, at 7:33 PM, drax7 wrote:

    The demand foe a third generation tesla at 40,000 is infinite given the size of the market. The backlog given restricted production of 500,000 per year will be years long.

    The author needs to get up you speed, read and educate yourself first before writing mumbo jumbo.

  • Report this Comment On May 24, 2014, at 11:24 PM, alik wrote:

    I don't think an affordable Tesla would create brand confusion. Tesla is the ONLY electric car maker to insist that an electric car be beautiful, highly functional and environmentally friendly at the same time. Conventional car companies are the ones with brand confusion - slow to even try selling alternative fuel cars, even though they've had the technology for decades. I've been waiting for Tesla to make a car I could afford to buy because I trust Tesla's integrity. I believe they make a high quality car. As far as brand goes, Tesla is THE electric car maker. My hope is that when they do produce a more affordable electric car, they're prepared to keep up with the demand.

  • Report this Comment On May 25, 2014, at 12:05 PM, hogfighter wrote:

    I love when analysts compare TSLA to other value companies. By definition, a company that is growing at 40% per year will not look at all like one that isn't growing much at all. If you wait to invest in TSLA until it has a valuation like other value stocks such as F, you'll be waiting about 30 years.

    So his 4 points are (1) TSLA might be growing too fast (yeah, right), (2) watch out for competition (yeah, right), (3) a recession could hurt demand (possible, but highly unlikely), and (4) TSLA is overvalued (see above paragraph).

  • Report this Comment On May 25, 2014, at 12:47 PM, Ustauber wrote:

    Kyle,

    With all your degrees and you JUST forgot mentioned the model X coming up.

    Just imagine an SUV with Falcon doors that

    Is elegant,fast and electrical.

    Also think about how many companies are building

    A Supercharger network ... NONE.

    Rethink when you write this Nonsense articles .

    ThxTsla

  • Report this Comment On May 27, 2014, at 12:13 PM, damilkman wrote:

    You bubble folks are insane and never read your history lessons. Every index of the green bubble is priced to be an absolute success even if only 5% of the total index is going to be worth their current price. Do you not forget the Internet Bubble? A lot of folks will make some money if they time the market. But when the bubble pops a lot of people will be crying. Cisco, Juniper, Level3, Sun, Worldcom, Celera, AOL. I won't even go into the pure internet plays. Who was really worth the money? Apple, Google, and perhaps Amazon. Amazon barely makes a profit. So jury is still out. Yet the legacy players like Verizon, AT&T, and Comcast make billions.

    Not saying that Tesla is the one in twenty. Is just that if I take posts from 15 years ago, the sheer folly of absolute certainty seems to be repeated yet again. People do not understand what a real moat is. Telsa may have something with brand and cool. But looking out a decade they have no moat. Toyota and Honda have been planning this inflection change for decades. I still recall the article in the Wall Street Journal(was it 97 or 98) where they laid out their plans for when and how ICE engines would be phased out. To imply many of these incumbents are just a bunch of clowns is as ridiculous as the Level3 cool aid drinkers who thought AT&T and Verizon were going to be ground into their elastic internet model. Much less Celera was going to make zillions on selling I don't know what.

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