The most common criticism about Tesla (NASDAQ:TSLA) stock is probably its valuation. Even at $100 per share, measured by typical financial valuation ratios, the stock was wildly overvalued. Now, however, we're talking closer to $225 -- the stock has soared a whopping 125% in the past 12 months.
Has the Street gone crazy? Observing the stock's valuation through the lenses of traditional financial ratios, maybe. But if this is our approach to searching for the value in a business like Tesla, we may always miss the mark. Motley Fool co-founder David Gardner explains:
[U]ltimately the valuation process is focused only on numbers you can find in financial statements (almost exclusively), which misses many of the most important things causing one company to fail and another to take over its industry. Things like innovativeness, competitive advantage, culture, disruptiveness, the management team -- NONE of these has a line item on any financial statement, and thus the valuation-obsessed analyst is calculating multiples off denominators that only include earnings [or other common financial figures like cash flow or sales], and not all the really interesting and rich stuff (just named) that should also be packed into that denominator. As a consequence, the companies with all the richest intangibles always look overvalued, when those intangibles themselves are exactly why the companies are poised to achieve persistent leadership and success in their businesses.
While the number-crunching investors and analysts manipulate and twist their spreadsheets to find a fair value estimate for America's hottest growth stock, let's examine Tesla's most important assets, all of which won't be found in the financial statements or in any traditional financial ratio.
This is Elon Musk we are talking about here. After making his millions with PayPal when it was sold to eBay, he set out on bigger missions: catalyzing the advent of sustainable transport with Tesla and sending humankind to Mars with Space X. Oh yeah, and he serves as the chairman at SolarCity, where he plans to undercut your electric bill and bring solar PV panels to the masses.
Last year, during his spare time, Musk even drafted up early designs of a tube he calls the Hyperloop that would shoot people in pods at 700 MPH.
As the CEO of Tesla Motors, Musk has already proved he can push the limits of what the public at large expects is possible. The stock's 500% rise in the past year and a half shows just how wrong the Street was about Tesla's potential before the Model S helped the company explode onto the auto scene.
2. Customer loyalty
Already, Tesla seems to have a cult-like following. The driving force behind its impressive Model S sales is word-of-mouth marketing. To this day, Tesla has no advertising budget, no plans to initiate one, and offers no promotions.
And no wonder Tesla doesn't need to pay for advertising, Model S owners absolutely love the car. Owners gave the Model S the highest owner-satisfaction score that Consumer Reports had seen in years in a November 2013 survey, with the car earning 99 points out of 100.
Tesla deserves some serious kudos for execution. Going from producing just hundreds Roadsters per year to selling 22,500 Model S vehicles during the sedan's first full calendar year of sales is an impressive achievement.
Probably Tesla's most valuable asset is its ambition. Elon Musk takes the first two tenets in the corporate culture principles, "Move Fast" and "Do the Impossible," very seriously.
This year, Tesla will break ground on its $5 billion Gigafactory, where Tesla plans to produce more lithium-ion batteries per year by 2020 than the entire world's annual supply in 2013. Where will the majority of this demand for all this battery production come from? Its planned lower-cost car scheduled for a 2016 or 2017 launch, Tesla says.
Looking much further out, Musk said at Tesla's annual shareholder meeting that multiple factories around the world could mean millions of Tesla vehicles sold every year.
If you're a shortsighted investor, stay far away from Tesla stock. But for the long-term investor, Tesla may be worth a closer look. While Tesla is certainly a pricey stock, investors shouldn't look it over simply because they can't get over its wild price-to-sales ratio. After considering all of Tesla's intangible assets, its recent execution, and its massive potential for growth, the stock may be more reasonably priced than it first appears.