Now, you have a $18.6 billion enterprise value for 2018, so discount it back by 15% a year and you get a present value of roughly $9.2 billion, which divided by the total number of outstanding shares, gives a $73 per-share estimate, well below the current $125 share price. Therefore, even under a very optimistic scenario, I find that Tesla is grossly overvalued. As a matter of fact, it is so overvalued, that as Jae Jung from Old School Value wisely puts it, it makes no sense to check the fundamentals of the stock or to even try to value it. Tesla is purely a story stock at the moment.
Recall also that Tesla’s P/E ratio is negative simply because the company is not yet in the profit zone. On the other hand, Toyota’s 21.04 and Ford’s 11.49 are both low and positive. According to Nasdaq and Zacks Investment Research, the forecasted P/E ratio for Tesla next year is 243!
The bull case
The bull case is quite emotional. First of all, nobody knows the potential market size. Some estimates suggest that the sales of all types of electric vehicles could be as high as 20% of the total U.S. auto market by 2020, but there are more optimistic ones. Considering that Tesla is probably the only electric-auto maker that is prepared for such a massive increase in demand, it makes sense to be long now. After all, Tesla is the only well-established electric car maker so far.
The other reason for being long Tesla is because both the increasing media coverage and the fact that it will join the NASDAQ-100 Equal Weighted Index will cause a further increase in demand for shares. So, even if the current stock price is way above the value that fundamentals dictate, an almost guaranteed further increase in demand for the coming months makes this a buy.
The bottom line
Personally, I think that we should not be overoptimistic with Tesla. Those who say that Tesla cars will replace traditional cars by 2020 may be too emotional, because that means an exploding growth rate in electric car sales has to take place in the coming quarters, which is not going to happen unless there is an external catalyst. However, Tesla does offer something new, artistic, clean, and luxurious – qualities appreciated by the higher-end segment of the market. In a nutshell, I believe Tesla will play a leading position in the future of transportation, but will not become the future of transportation.
In terms of value and fundamentals, Tesla is clearly an emotional stock. But the fact that it is highly overvalued does not mean it can’t be a great short-term investment. In other words, I see Tesla as a trading vehicle, rather than a long-term investment. It could be, in the future, a long-term investment, but the market will need to learn how to value an electric-car maker first. Tesla is not a value stock. Ford Motor Company (NYSE:F), on the other hand, may not be as artistic, revolutionary, and inspiring as Tesla, yet it has a lot of value to offer. Its past growth trajectory, recent dividend, and strategic partnerships with competitors suggest a higher P/E ratio than 11.5. Furthermore, the company surpassed its cash total for all of 2012 in only seven months. Unlike Tesla, Ford is showing solid signals that it is improving its free cash flow, but it does not have the same media coverage Tesla does. After posting amazing results in the latest earnings call, stock increased just 2.5%.
