Tesla Motors, Inc. (TSLA 1.85%) stock has been on the run this year, up about 63% year to date -- and that's on top of a monstrous 360% rise in 2013. A recent pullback in the share price from an all-time high of $291 to $245 may have some investors contemplating buying shares of this high-flying stock, hoping to jump in on the ride. But even after the pullback, the wild run-up this year makes waiting for a larger pullback a smart move.
Model S. Source: Tesla Motors.
Priced for perfection
While the lucrative gains Tesla shareholders have seen in the past 12 months may be nice, the valuation is arguably now in speculative territory. Even Tesla CEO Elon Musk said on CNBC earlier this month that the "stock price is kind of high right now."
For perspective, consider that Tesla currently trades at a market capitalization of $32.3 billion, more than half of General Motors' $54.7 billion market cap. Meanwhile, Tesla is only predicting to sell just over 35,000 cars this year. Compare that to GM's 2013 vehicle sales of 9.7 million. In other words, Tesla boasts more than half of GM's market cap, yet it only records a very tiny fraction of GM's vehicle sales.
To be fair, the average selling price of Tesla vehicles is more than double GM's -- and the same is the case for Tesla's healthy profit margins. Furthermore, Tesla hopes the construction of its Gigafactory, a factory purposed to build lithium-ion batteries at unprecedented volumes and spark economies of scale that would enable the company to bring to market a vehicle at half the price of a Model S by 2017, will help it sell 500,000 vehicles per year by 2020.
The starting price of a Tesla Model S is close to $70,000. The company plans to sell its Model 3 in 2017 for just $35,000 with the help of the economies of scale that will come along with the Gigafactory. Source: Tesla Motors.
Maybe it's these latter factors that inspired Musk's follow-up comment on CNBC earlier this month on Tesla's "kind of high" stock price: "If you care about the long term, Tesla, I think the stock is a good price. If you look at the short term, it is less clear."
While the long-term is the Foolish way, it would still be wise for investors to tread carefully with the valuation as robust as it is today. Sure, the company's continued excellent execution combined with its ambitious plans mean investors who already own shares have no reason to sell. But for those looking to buy Tesla stock, it's worth waiting for a larger pullback -- perhaps closer to $215 levels. This would provide some breathing room in the wildly optimistic expectations baked into the share price today.
Risk is meaningful
While Tesla's narrow focus on battery-powered electric vehicles is the very foundation of its excellent execution to date, and while it's likely to be the reason for the company's success in the future, it is also an enormous risk factor. For instance, if future breakthrough technologies present a marketable and competitive alternative to Tesla's lithium-ion batteries, the company's $5 billion Gigafactory could face major setbacks, or even become outdated.
This sort of colossal risk means investors should look for a meaningful margin of safety before they buy shares. At these levels, Tesla stock is certainly worth holding, but calling the stock a buy today is a bit speculative.
