Tesla Motors (TSLA)
was one of the bigger stock-market winners last year, rising from $33.87 on Dec. 31, 2012 to $150.43 on Dec. 31, 2013 – a whopping 344 percent gain in only 12 months.
While the company is run by perhaps one of the more brilliant thinkers and successful business persons of the past several decades, it’s difficult to reason that the company’s stock is worth anywhere near its current price of around $150 per share, especially after considering that Tesla has yet to make a profit and that it appears to be in no sight of generating a profit.
Since you’re probably already familiar with Tesla, I’m not going to spend a lot of time discussing the company’s products, other than telling you a little bit about their Model S sedan and new Model X crossover vehicle.
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Tesla’s Model S five-passenger sedan, which is the world's first premium electric car, provides an unprecedented driving range of approximately 210 miles for its standard 60 kWh battery and 265 miles for its 85 kWh Performance Battery.
The 60 kWh-battery model, which is priced at approximately $70,000, is equipped with a 302 horsepower (hp) engine that propels the 4-door sedan from 0-60 miles per hour in only 5.9 seconds, with a top speed of 120 mph. In comparison, the BMW 535i, which is equipped with a 300 hp engine and can go from 0-60 mph in 5.5 seconds, is priced at only $55,000.
Meanwhile, the 85 kWh Performance Battery version of Tesla’s Model S, which is priced at $93,400 and equipped with a 416 hp engine, can go from 0-60 mph in only 4.2 seconds and reach a top speed of 130 mph. In comparison to that version of the Model S, the BMW 550i, which is equipped with a 445 hp engine and can go from 0-60 mph in 5.0 seconds, is priced at $63,900 – almost $30,000 less than a comparably-equipped Tesla.
In case you’re wondering why I chose to compare the Tesla Model S to BMW’s 5-series, I did so because those cars have similar features and they tend to appeal to a similar market demographic.
In an effort to expand its product offerings, Tesla plans to begin production of a new crossover vehicle, the Model X, later this year. That vehicle, which is built on the same platform as the Model S, but with a longer wheelbase, is being designed to provide the roominess of a minivan with the style of an SUV.
While the Model X has approximately the same external dimensions of an Audi Q7, it has approximately 40 percent more space than a Q7 on the inside and is capable of carrying seven large adults. Tesla unveiled a prototype of the Model X during February 2014 at its Los Angeles Design Studio.
Equipped with Falcon Wing doors, which open up and out of the way, the Model X enables one to stand up and to step directly from the second row to the third row of the vehicle.
Like the Model S, the Model X accelerates very quickly, going from 0-60 mph in a blazing 4.4 seconds – faster than many mass-produced sports cars.
Tesla plans to begin full production of the Model X by the second quarter of 2015, and it plans to price the vehicle in-line with other premium sports utility vehicles.
What’s the Stock Worth?
Although I liked everything that I read about Tesla, and was very impressed with the Model S’s that I saw at the company’s Dania Beach, Fla., store, this article is not about the quality of the automobiles that Tesla makes, it’s about the company’s stock price.
Now, don’t get me wrong, the products that a company makes is always a very important factor that I consider when deciding whether or not to invest in any given company’s stock.
But, it’s never the only factor that I consider. Quite the contrary, I place a lot of emphasis on the likely future demand for a company’s products and whether or not competitors might soon offer similar products. And, those are two of my bigger concerns regarding Tesla.
For example, since Tesla began producing the Model S during June 2012, it had sold only 18,200 of those vehicles through September 30, 2013.
If the company’s estimates turn out to be correct, it sold another 6,000 units of those vehicles from October 1 to December 31, 2013, resulting in total units sold of only 24,125 since the introduction of the Model S.
Of utmost concern, the company stated in its third quarter earnings release that it expected its “non-GAAP profitability [for the quarter ended Dec. 31, 2013] to be about consistent with Q3” – the company expected its costs to rise just as much as its revenues.
Although the demand for Tesla’s vehicles will likely continue to rise over the next couple of years, there’s no reason to think that any increases in the company’s revenues will lead to it earning a profit. Quite the contrary, I would expect any substantial increases in demand to result in Tesla spending substantial sums of money on expanding its manufacturing facilities, as well as on marketing initiatives and the opening of new stores. Those operating expenses would likely lead to further operating losses, or very minimal profits.
In regard to any competition that Tesla might face in the event that the demand for Tesla’s vehicles were to rise sharply, several more-established automobile manufacturers have already entered, or have announced plans to enter, the electric vehicle market. For example, Nissan introduced the Nissan Leaf, a fully electric vehicle during December 2010, and Ford introduced the pure electric Ford Focus during 2012.
Although those cars don’t cater to the same demographic as the Model S, the production of those vehicles illustrates clearly that Nissan and Ford could use its expertise to introduce higher-end electric vehicles to compete with the Model S and the soon-to-be available Model X.
Meanwhile, BMW, Daimler, Lexus, Audi, Fiat, Renault and Volkswagen are in the process of developing their own electric vehicles. In addition, automobile manufactures in China are producing electric vehicles there.
Those are very significant concerns because all of those competitors have significantly greater financial, technical, manufacturing, marketing and other resources than Tesla. They also have more extensive customer bases and broader customer and industry relationships than Tesla.
Another concern that I have is the value that stock market participants have placed on Tesla. For example, Tesla’s stock is trading currently at a price-to-sales (P/S) ratio of 13, while Ford, General Motors, Daimler AG, and Toyota’s stocks are trading at price-to-sales multiples of less than 1. Hence, stock market participants appear to be overvaluing Tesla by a huge margin.
Because of the factors discussed above, I urge those of you who are just as interested in preserving the value of your financial market assets as in striving to grow the value of your assets to stay away from Tesla.
If you’re an aggressive speculator, you might want to follow the lead of Tesla’s insiders who’ve been selling the stock in droves, with my research indicating that 99 out of 106 insider transactions were sells, as opposed to buys, since July 2010. That is, you might want to consider selling Tesla short.
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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.
In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.
David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.
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