4 Reasons You Should Wait to Buy Tesla Motors Inc.

Tesla has nearly quintupled during the last 52 weeks -- why now isn't the best time to go long for the first time.

May 24, 2014 at 1:15PM

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
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

Article by Kyle Richert, edited by Marie Palumbo and Chris Marasco, none of whom has a positions in any of the stocks mentioned. The Motley Fool recommends General Motors and Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers