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Why Tesla Motors' Stock Hasn't Changed as Much as You Think

Tesla Motors (NASDAQ: TSLA  ) is a polarizing stock for investors; while many have a firmly entrenched belief that the company is wildly overvalued, others are equally passionate that the company's long-term prospects make it a bargain at just about any price. The result of this dichotomy has been exceptional volatility as noted by the company's share price over the past year. But how much is the story really changing each day?

On its way to market-beating returns, Tesla has had plenty of days with double-digit percentage price swings, as evident in the table below:

TSLA Total Return Price Chart

TSLA Total Return Price data by YCharts

While Tesla's shares have crushed the market and the company's peers in the auto industry such as Ford Motor (NYSE: F  ) and Toyota Motor (NYSE: TM  ) , this rise has not been without bumps. Recently, comments from everyone from an analyst at Morgan Stanley to George Clooney have sent Tesla shares moving significantly. 

Lofty valuation
Tesla has traded at much higher valuation multiples than its peers in the auto industry since its IPO. And since June, the gap in valuation between Tesla and its peers has only expanded, as noted below:

TTM revenue (in billions)  $1.7  $146.3  $154.3  $301.1 

TTM price to sales ratio 

10.4  0.5  0.3  0.7 
2014 estimated revenue growth  34.3%  4.6%  6.5%  5.1% 
TTM price to earnings ratio  N/A  11.73  16.46  10.85 
Forward price to earnings ratio  92.63  9.08  8.31  9.79 
Five year expected earnings growth rate  18.9% 14.8%  16.8%  33.2% 

Source: Motley Fool CAPS and Yahoo! Finance as of Dec. 5.

Investors should take a moment to really absorb this information. Tesla trades at a price to sales ratio 20 times higher than Ford and General Motors (NYSE: GM  ) . Toyota has generated 177 times the revenue that Tesla has over the past year.  All three of these competitors boast forward earnings multiples of less than 10, which is quite reasonable given the growth prospects for the industry. 

Automakers traded on foreign exchanges such as BMW (NASDAQOTH: BAMXF  ) , several of which are more comparable to Tesla based on average vehicle price and target demographic, also trade at multiples close to that of Ford, GM, and Toyota.

Take a deep breath and focus on the long term
Investors in Tesla are looking for the tremendous growth that comes with disrupting the auto industry. Quite simply, there is no other way to justify an investment at the current valuation given the disparity between Tesla's valuation and that of its peers. 

Additionally, the current valuation also makes Tesla look more like a tech stock than an automaker -- more than GM. Like tech innovators, Tesla has taken an established product and fundamentally changed it, from eliminating dealership middlemen to installing free charging stations along major highways.

Over the long-term, analyst notes that send the stock up or down 10% in a given day really do not matter. Even the three over-publicized fires experienced with Tesla Model S sedans have already proven to be more short-term sensationalism than thesis-altering events. 

Instead, pay attention to the big trends rather than the countless headlines. Are electric vehicles continuing to gain momentum? Is Tesla still getting top grades from Consumer Reports in terms of safety ratings and customer satisfaction? How are the Model X and next generation Tesla designs progressing? These are the data points to monitor, since they are direct indicators of the company's ability to continue on its growth trajectory.

Decision criteria
Since long-term investors are looking ahead at what Tesla can become over the next decade, trailing revenue and earnings data is not terribly useful. As a result, the decision of whether to invest in Tesla today or not continues to be based on Tesla CEO Elon Musk and his vision that the company can sell 500,000 cars annually (20 times the number the company will sell in 2013).

If Tesla can achieve that type of long-term success, shareholders will be well-rewarded with an investment today. However, it is quite reasonable for investors to look at this information and take a pass on Tesla's stock if they do not believe that Tesla can reach these production levels, or can't stomach the sort of 30% share-price declines that Tesla experienced in November. 

Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

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 December 15, 2013, at 4:19 PM, Jason87467 wrote:

    Why are Tesla stock buyers so blind? There we have a start up company who has little experience in building cars and who is bound to make huge mistakes in the process, a company who's CEO makes fun of it's competitors, a company who has not made any real profits, a company who says they'll make a lot more cars than they possibly make with it's existing infrastructure (such an infrastructure takes many many billions and many many years to build).

    Does Tesla think the competition is just going to roll over and do nothing? People, building cars is not like making cell phone or software. It takes years to build factories, to tool up for cars and Tesla does not have that time to be successful.

  • Report this Comment On December 15, 2013, at 5:47 PM, blando3 wrote:

    So far Tesla have proved themselves to be a force to be reckoned with in the EV world. Unlike other car manufacturers, they have no ties or obligations to the oil industry, and no incentives to make a lousy electric car. Other car manufacturers make crappy EVs because they don't want to cannibalize their own sales of ICE vehicles, a technology they have sunk billions of dollars into for many decades.

    Elon Musk is smart and unconventional. You say Tesla lacks the chops to be successful, but so far they have proven the naysayers to be wrong with their critically acclaimed Model S. Tesla are just revving up their motors. Don't miss the ship before it sails.

  • Report this Comment On December 17, 2013, at 6:42 AM, AnsgarJohn wrote:

    Tesla is crushing it in Germany. In 2014 the Autobahn will have chargers north to south, east to west.

  • Report this Comment On December 17, 2013, at 6:42 AM, AnsgarJohn wrote:

    Model X

  • Report this Comment On December 18, 2013, at 9:46 AM, ToddRLockwood wrote:

    @ Jason87467: Many TSLA stockholders, at least those who bought stock in 2012 at under $30/share, have first-hand experience because they own a Tesla. They follow developments at the company on a daily basis and have visited the factory to see for themselves.

    Tesla Motors is 10 years old. They have a significant lead in EV technology and manufacturing. So far, the other car makers have made the mistake of entering the EV market at the low end, where buyers are more price sensitive. New tech always has a better chance of survival if companies start at the top of the market and work down from there. Tesla is the only manufacturer to get it right so far.

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