Does Tesla Motors' CEO Elon Musk Think That His Company's Stock Is Overvalued?


Source:  Wikimedia Commons

I have to confess. I had hoped for this article to be a bullish, possibly best-case scenario on how Tesla (NASDAQ: TSLA  ) could fundamentally justify its current stock price (and beyond) following an interview with its CEO Elon Musk on CNBC. Even after doing much mental gymnastics, though, I just can't do it. The facts cannot be denied; Tesla is overvalued.

October 2013 interview
Back on Oct. 24, 2013, with the company's stock price hovering around $170, Musk gave an interview that included commentary about Tesla's stock price and valuation. At the time, he stated that Tesla's stock price was "more than we deserve," although to be fair that was completely taken out of context by many talking heads in the media.  

The reality is that Musk was referring to the speculation behind the valuation. He also said in the interview: "We're going to do our best to fulfill the expectations of investors, and I think in the long term that stock price is going to seem fair. It's difficult to predict where it goes in the short to medium term, but I do feel good about the company achieving that value and more in the long term."

June 2014 interview
Fast-forward to the recent past, when Musk offered further clarification, in another interview with CNBC on June 9, that Tesla's value is driven mostly by speculation on its future execution, and any change in that perception has a dramatic effect on the company's stock price. Well, most investors already knew that. I always get a chuckle whenever Tesla's critics attempt to value the company based on historical numbers only.

Probably nobody has more information about the future of Tesla than Musk himself. So, with the company's share price now up more than 20% since October, what does he think? In the recent interview, Musk said, "We need to execute very well over the next few years in order to justify the stock price. I'm feeling like we probably will."

Plugging in some numbers
Tesla has several advantages over other car companies, such as not needing to spend a single penny on advertising and very high profit margins. However, Tesla is only servicing the high-end-vehicle market, and with cars that can be sold for upwards of $100,000, it's automatic to expect profit margins to be robust. But, Tesla's margins don't seem all that special at 25%. For example, Porsche reportedly has garnered 50% gross profit margins in China.

Tesla expects to expand gross profit margins to 28% by the end of the year. According to Musk during the company's recent shareholder meeting, that will be due to a lower average selling price per vehicle. Musk said during the meeting, "We expect to see a slight decrease from people spending on the order of a $100,000 a car to maybe $95,000 a car which is still quite a lot."

With so many unknowns about costs, administrative expenses, Gigafactory expenses that are allotted to the quarterly income statements, and other expenses, it's like trying to guess the number of jelly beans in a jar to try to accurately pinpoint future earnings per share. With Tesla expecting to enter the mass market with cars priced around $35,000 in the next few years, investors can expect that some degree of advertising will be needed. Overhead will escalate, R&D spending will continue to lift, and Tesla will start to look more like a regular car company in terms of bottom-line profit margins.

More info we do have
We know from previous conference calls that Tesla "ultimately" wants to produce 500,000 cars. We know that it is targeting to produce 1,000 cars per week by the end of this year, a rate of 52,000 annually. Let's assume that the "ultimate" number for production of high-end Tesla vehicles is 150,000 per year, or roughly triple the 2014 end-year target rate. That leaves 350,000 units of the third-generation vehicle, or 70% of production, as a best-case estimate for the mass market release. 

Using $100,000 per high-end model and $35,000 per mass-market model, total annual revenue comes out to $27.25 billion. That is pretty close to Tesla's market cap now, which means that it already trades at one time the best-case, long-term sales.

General Motors (NYSE: GM  ) trades at about one-third of sales. That makes Tesla three times more expensive. True, growth stocks deserve higher multiples, but remember that it is already assumed that the growth will come in as planned and will be executed perfectly, and that Tesla will hit a more mature phase with -- presumably -- a more mature and lower multiple.

Source: Tesla Motors

Will the bottom-line profit margins be higher for Tesla's vehicles forever? Maybe, but Deepak Ahuja, Tesla's CFO, stated in the last conference call, "As revenue is going to pick up significantly, the percentage of revenue of R&D expenses it is going to be I expect in the single-digits – high-single-digits." Backing out 8% from Tesla's 28% gross profit margin estimate leaves around 20% for selling, general, and administrative expenses. That doesn't leave much room to have extraordinary pre-tax net income margins high enough to justify a valuation that is triple the price-to-sales ratio of General Motors.

Foolish takeaway
Either Musk is mistaken that Tesla will be able to realistically justify its current valuation, or he has an ace up his sleeve regarding other revenue sources, a surprise jump in profit margins somewhere, or another game plan that we can't yet imagine. I, for one, will be watching closely... but will be doing so from the sidelines for now.

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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 June 30, 2014, at 4:15 PM, weaponz wrote:

    I don't think Tesla will need to spend any money on advertising any time soon. They get a lot of free publicity when the car shows up in hollywood. On top of that social media and etc gives Tesla a lot of advertising.

    As far as production goes, actually the 500k cars is based on how much the gigafactory will produce. That will be for the Gen 3 cars. Model S and Model X will be still from the Japanese battery factories. So if you are estimating 150k model s/x + 500k gen 3 = 650k cars.

    Your revenue numbers are also a bit off, Tesla Model S starts at 70k, average sell price is as you said 95-100k, the Gen 3 base price is 25k, but most cars sold will probably be 45k+.

    Also, don't forget that Tesla plans to sell batteries for electriicty storage with solarcity.

    By end of 2015, Tesla will be done with supercharger roll outs and most roll outs will simply be minor expansions. So costs for superchargers will drop.

    Tesla right now is also spending % wise more than 2x more companies, I also don't see why you are limiting Tesla to 28% gross profit margins.

    Also, when comparing to GM's valuation, is that factoring in issues with the ignition switch?

  • Report this Comment On July 01, 2014, at 8:49 AM, PresidentJim wrote:

    As the odometers climb on the Tesla Model S units out there on the highway, the truth is finally emerging about these battery-powered cars. The early fan-buyers of Model S are becoming increasingly disgruntled. Edmunds reports that the high performance drive train in the Model S breaks down about every 10000 miles. Meanwhile, Tesla is paying dearly to keep their sold units rolling while they are under warranty. Search the NHTSA database for the honest truth about Tesla's Model S many quality issues. NHTSA is more objective than the googly-eyed journalists who fantasize about Elon Musk being a real-life Tony Stark. I don't see a car that wears out special $1000 tires every 10,000 to 15,000 miles catching on with the general public. That mileage figure comes from the Tesla owners web blog.

    The warranty cost for a Tesla is also 9-to-10 times higher than Ford or GM warranties. The reason for that is that Teslas require heavy maintenance when driven for practical usage.

    Customers of Tesla are also complaining about their Teslas "stopping abruptly", sometimes inexplicably, but particularly when water is spilled inside the passenger compartment.

    Customers are also still posting photos of charred Tesla charger connectors even after Tesla claimed that they had "fixed" that hazardous problem.

    Is the Model S really Green? No, says one industry analyst (Unit Economics) who pointed out that when, "CO2 emissions of Model S production and charging inefficiencies are included, an 85 KWH Model S produces 547 g of CO2 per mile, higher than a large SUV such as Jeep Grand Cherokee, which emits 443 g per mile."

    I will gladly provide links to documentary support of each claim in this post.

  • Report this Comment On July 01, 2014, at 6:36 PM, Jason87467 wrote:

    Tesla is operating on hype, not on merit. The media makes it look like it's the most high tech car in the world. And I ask, what's so high tech about this car that uses GM's skateboard design with about 7 thousand laptop batteries? The answer is nothing. Sooner or later the hype will end and the Tesla company will come crashing down. Wait and see.

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