What's not to love about Tesla (NASDAQ:TSLA)? The stock is a huge outperformer, up more than 1,000% over the past five years. The company seems to be well on its way toward executing its longtime strategy of making electric vehicles and solar energy affordable for average consumers. It's also well on its way to becoming a household name like Ford (NYSE:F), General Motors (NYSE:GM), or BMW (NASDAQOTH:BAMXF).
But if you're not already a Tesla investor -- or if you're hoping to buy more shares -- that huge per-share price tag probably looks a bit steep, especially for a company that has yet to turn a profit. Let's look at where the company is and see if we can determine whether it's a buy.
The good news
First, let's look at the positives. Tesla is selling more cars than ever, thanks to the release of its affordable -- well, comparatively affordable -- Model 3 sedan. Tesla reported in August that it had more than 400,000 preorders for the vehicle and that it was receiving 1,800 Model 3 orders per day. Considering it expects to be able to manufacture only 20,000 Model 3s per month by December, that's a backlog that would make any car company -- heck, any company -- envious.
Unsurprisingly, given this barrage of orders, the company's finances are in better shape now than they were a year ago. Tesla is sitting on a $3 billion cash hoard, and revenue in its latest second quarter was up 119.7% year over year. Some of this increase was due to its SolarCity acquisition in Q4 2016, but most of it came from automotive revenue, which was up 93% year over year. Earnings losses were lower than they were a year ago as well, and the company is predicting that it will continue to post more revenue and smaller losses into the future.
The company's Gigafactory 1 in Nevada has already begun cranking out battery packs and will be fully operational by 2020. Tesla is set to unveil an electric semi-truck, and possibly some other new product, this month. It anticipates that its run rate will increase from about 100,000 vehicles this year to 500,000 next year. Its recent purchase of SolarCity at a bargain-basement price adds more opportunities for growth.
But even with all that said, the company isn't a clear buy.
The bad news
With the stock's incredible run, Tesla's market cap has soared to about the same size as that of fellow automakers Ford, GM, and BMW. But Tesla's revenue and earnings aren't even in the same neighborhood as the other three automakers':
|Company||Market Cap||2016 Revenue||2016 Normalized Diluted EPS||Dividend Yield|
|BMW||$66.6 billion||$104.2 billion||$11.71||3.8%|
|General Motors||$58.8 billion||$166.4 billion||$5.88||3.8%|
|Ford||$46.7 billion||$151.8 billion||$0.95||5%|
|Tesla||$56.9 billion||$7.0 billion||($4.68)||None|
Tesla's valuation seems outrageous compared with that of its automotive peers. Its revenue is a drop in the bucket, it appears to be hemorrhaging money, and it pays no dividend whatsoever. Also, a recent $1.8 billion bond offering will bring the company's total long-term debt to somewhere in the neighborhood of $9 billion, far outstripping its cash on hand.
The silver lining is that despite its massive amount of capital spending and negative earnings, Tesla actually has comparable debt ratios to these larger peers, even with the $1.8 billion in new bonds factored in.
However, these peer companies are making strides in electric vehicles themselves -- GM, with the Chevy Bolt, and BMW, with the i3. With their substantial resources and robust marketing and sales infrastructure, they also have many advantages Tesla lacks.
Given all this information, Tesla seems like anything but a bargain.
What really matters
But Tesla really isn't a car company: It's a tech company betting on renewable energy. CEO Elon Musk hopes to change the way electricity is generated and used around the world; cars, solar panels, and home batteries are each just a facet of that overall goal.
Tech investors will surely recall that Amazon.com didn't turn a profit for seven years. But its model allowed it to dominate its market once it had achieved significant economies of scale. Right now, Tesla is in that same stage of growth. So if that's the case, valuations and comparisons with other car companies don't matter as much as the company's trajectory.
On the other hand, a lot had to go right for Amazon to become, well, Amazon. We're still waiting to see if everything will go right for Tesla. If a rival can get an affordable electric vehicle on the road faster -- one that's actually affordable, not comparatively affordable -- or if there are delays in getting the Gigafactories fully operational, or if one of any number of other things happens, Tesla and its investors could be in for a very rocky road.
Proceed with caution
Whether you think Tesla is a buy depends largely on how well you think Musk and Tesla's management can navigate the next three years, and whether the energy and automotive markets are going to go along with his vision.
I'm cautiously optimistic that Musk and Tesla will prevail. I think the good news from the company outweighs the bad. However, you should be aware that it isn't a slam-dunk investment, and it's certainly not as good a value proposition as it was a year ago. Even Musk himself has questioned the company's lofty valuation, so if you buy in now, anticipate that there may be a pullback at some point -- and that that point may come sooner rather than later.