Is Tesla Motors Inc.'s Stock a Good Buy or a Dangerous Bet?

Tesla has won over the public with its spectacular cars. But after a big run, is the stock too hot to handle or is it ripe for picking?

Aug 17, 2014 at 6:38PM

Model S

Tesla Model S. Source: Tesla Motors

A few weeks ago, I set out to really delve into Tesla Motors (NASDAQ:TSLA) to decide whether it is worth my investment dollars. 

Let's be clear upfront: Tesla makes some of the coolest cars around, at least in my opinion. CEO Elon Musk has turned the electric-car market upside down with the Model S, the soon to be released Model X, and the upcoming, potentially game-changing Model 3

The Supercharger network and Gigafactory could also be game changers (and you can read more about them in an earlier article). But with all that said, if the valuation doesn't make sense, then what's in it for investors?

What's the potential?
Some investors are likely to find Tesla "un-investable," considering that it is not yet profitable on a generally accepted accounting principals basis, while trading with a market cap of almost $30 billion. 

For perspective, Ford and General Motors trade with a market cap of $66 billion and $55 billion, respectively, while producing millions of vehicles per year. Tesla produced about 22,500 vehicles in 2013. 

If the company's Gigafactory is successful and on time, it will produce enough batteries to supply 500,000 vehicles per year in 2020.

Let's assume that Tesla can produce that many vehicles per year. (Just hang with me for a second, because making estimates on cars that don't exist yet isn't exactly easy.) But here's a quick "estimation table" of what those sales could look like in 2020:

Vehicle Sales (units) Average Selling Price Total (in billions)
Model S 125,000 $80,375 $10.05
Model X 125,000 $86,250 $10.8
Model 3 250,000 $40,250 $10.06
Total 500,000   $30.9

Source: Author's estimations.

The Model 3 has an estimated price of $35,000 -- at least, that's Musk's intention. The Model S starts at $69,900 and the Model X does not have a known price yet, but I used $75,000 as an estimated starting price for the Model X, though this may be conservative. I added a 15% premium to each model's starting price to account for upgrades and higher prices. 

The result is $30.9 billion in sales for 2020, if there aren't any hangups in the Gigafactory and if it does indeed produce enough batteries for 500,000 vehicles per year. Of course, Tesla would need to sell 500,000 vehicles per year as well, not just produce them. 

Anyway, that's one of the better-case scenarios for Tesla. The best case would have the same amount of unit sales, just with higher prices. 


Tesla Roadster. Source: Tesla Motors

What is Tesla -- automaker or technology company?
This has drastic implications with regard to how one should value Tesla's stock. Is Tesla an automaker? Because if so, today's stock price may already be considered fully valued, even based on those tremendous sales estimates for 2020. Allow me to explain. 

The automotive industry trades with an average PS ratio of 0.9. Meaning that if Tesla were to have about $31 billion in sales in 2020, a 0.9 PS ratio would indicate a market cap close to $27.8 billion. 

However, if Tesla is considered a technology company, that sector trades with an average PS ratio of 3. In other words, its hypothetical $31 billion in sales for 2020 could justify a market cap of roughly $90 billion -- over three times today's valuation. 

Truth be told, the answer likely lies somewhere in the middle, that is, between an automaker's valuation and a technology company's valuation. The midpoint, or just about 1.5 times sales, would roughly indicate a market of $60 billion. 

Model S

Tesla Model S. Source: Tesla Motors

Foolish final thoughts
The company has to continue improving margins, boosting sales and upping production. Supercharger stations must continue coming on line, and the Gigafactory can't have any major delays.

Aside from significantly boosting the scale of production, the Gigafactory will also significantly reduce input costs, perhaps by as much as 30%. A lot obviously hinges on the Gigafactory, and that's part of what makes Tesla such a gamble and hard to value.

Although the recent announcement of Panasonic joining in on the Gigafactory investment lifts some of the risk off Tesla. 

Tesla makes amazing vehicles, and Musk has tremendous vision. Shares are what I would call "fully valued" at current levels for the next several years. This is because investors have already priced in so much good news and near-perfect execution. Looking into the future by five to 10 years, Tesla appears undervalued.

Of course, this all depends on the investor, too. Those invested in Tesla should be in the stock because they believe in the long-term, disruptive potential of the company, which comes with very high valuation metrics, as well as lots of volatility. So investors should consider these things when determining if the stock is a good fit for them and their tolerance for risk. 

As electric vehicle driving ranges increase, batteries get cheaper, and performance gets better, more and more consumers likely will consider making the move to electric vehicles. For now, Tesla is at the forefront of that movement. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Bret Kenwell owns shares of Ford. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers