Tesla Motors (NASDAQ:TSLA) has grown from a niche upstart automaker into one of the most disruptive car companies on the planet today. The company's shares have enjoyed a similar rise, climbing more than 753% since the electric-car maker's stock market debut in 2010. If you were an early investor in Tesla Motors, it is likely one of your most rewarding investments to date.
Yet with a market cap north of $25 billion, many would-be buyers worry that the stock is wildly overvalued. They're not wrong. With a price-to-sales ratio of 8.12, Tesla's stock is expensive at its current levels. Put plainly, this means that investors are paying roughly $8.12 for every $1 of sales Tesla earns today. For comparison, rival automaker Ford (NYSE:F) currently boasts a P/S of just 0.45.
Analysts love to compare Tesla's ballooning market cap to that of Ford and GM. However, this highlights a flaw in the way the market is analyzing the company.
More than an automaker
The ongoing build out of Tesla's Gigafactory, together with its strategic partnership with SolarCity (NASDAQ:SCTY), position the California-based company to be much more than just an electric-car manufacturer. Slated to be the largest lithium-ion battery plant in the world, Tesla's Gigafactory will enable the EV maker to produce enough lithium-ion cells by 2020 to power 500,000 electric cars. However, that is only part of the story.
Tesla's chief executive Elon Musk says the company also plans to develop lithium-ion batteries that will power homes and offices. It's a natural fit for the company considering Tesla already provides SolarCity with lithium-ion cells for its solar energy storage systems. During a recent conference call with analysts, Musk said Tesla would likely begin production on a "home battery" in the coming months. This would give Tesla a more direct entrance into the energy storage market, and could translate into a lucrative revenue source outside of its core EV market down the road.
Tesla's growing brand recognition, visionary leadership, innovative technology, disruptive retail strategy, are other catalysts that aren't reflected in its financial statements. Yet all of these things will undoubtedly contribute to its long-term success.
Playing the long game
Because Tesla is still in the early stages of what could be a historic growth story, traditional valuation metrics will only get you so far. Investors can expect Tesla's capital and operating expenses to soar in 2015, as the company continues to heavily invest in multiple areas, including the Gigafactory, its Model X vehicle, new store openings, and the expansion of its Supercharger network both domestically and abroad. Therefore, margins will likely be crimped in the near-term. However, as Tesla has already proven many times over, it knows how to revolutionize industries in ways that others once considered impossible. Ultimately, Tesla Motors is playing the long game, and investors should too.
Investors should also keep in mind that growth investing often requires that you check your emotions at the door. Truly disruptive companies such as Tesla Motors are frequently masked behind lofty valuations and largely unproven business models. Therefore, investing in these companies takes time and patience.
Given the immense opportunities that lie ahead for Tesla Motors, I believe investors with a six- to 10-year time horizon will be generously rewarded for ignoring the stock's frothy valuation today. Musk seems to agree. Tesla's outspoken CEO recently proclaimed that the company could be worth as much as $700 billion by 2025. Using back of the envelope math, Musk explained:
"If you take this year's revenue, around $6 billion or thereabouts, and if we are able to maintain a 30% growth rate for 10 years, add to your 10% profitability number, and have a 20 P/E, our market cap would basically be the same as Apple's is today. That's going to require a bit of -- on the order of $700 billion -- obviously, getting there will requires some significant CapEx, but I am hopeful that we can do this without any significant dilution to the Company, maybe minor dilution but nothing serious."
While this is undoubtedly ambitious, it proves that much like the late Steve Jobs, Elon Musk has grand visions for Tesla Motors' future. And given his past performance, I believe investors would be wise to jump on the Musk bandwagon once and for all.