Tesla Motors (TSLA 0.21%) 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 data by YCharts
While Tesla's shares have crushed the market and the company's peers in the auto industry such as Ford Motor (F -1.19%) and Toyota Motor (TM 0.14%), 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:
| Metric | TSLA | F | GM | TM |
|---|---|---|---|---|
| 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 (GM 0.07%). 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 (BAMXF 3.93%), 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 Amazon.com 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.
