Whenever you stumble on the phrase “Mr. Market,” you think of Ben Graham talking about how a stock is undervalued. But, these days, this isn’t the case when you see this phrase, especially whenever Tesla Motors Inc (NASDAQ:TSLA) is being spoken of somewhere in the mix.
Now people say Mr. Market is so dumb that it’s attributing an unworthy value to Tesla Motors Inc (NASDAQ:TSLA). Their arguments revolve round one singular fact – Tesla Motors Inc (NASDAQ:TSLA) hasn’t seen the sales to justify its share price. And all I can sense is that they want Mr. Market to wake up from his slumber and give Tesla Motors Inc (NASDAQ:TSLA) what they think is right. I, on the contrary, don’t share this opinion and I’ll show you why in this article.
I’d like to take you through the archives. Tesla Motors Inc (NASDAQ:TSLA)’s critics seem to fume each time a comparison is drawn between Apple Inc. (NASDAQ:AAPL) and Tesla Motors Inc (NASDAQ:TSLA). They don’t want to hear anything like Tesla is the next Apple Inc. (NASDAQ:AAPL). But either you like to hear it or not, Tesla’s current state is quite reminiscent of what Apple Inc. (NASDAQ:AAPL) experienced in late 1990s. And we all know that trends matter in investing.
Soon after Steve Jobs took over the reins at Apple in 1997, Apple stock began to do well again, rising to the region of $40 per share. I’d like to point out something here. Apple’s net sales were on a decline at that time, with 1995 being the last fiscal year it witnessed an increase in net sales. In addition, Apple reported a net loss in 1997, the year Jobs took over.
Mr. Market was probably dumb at that time to have allowed Apple’s price to soar amid these hiccups, too. So the rise in stock price Apple witnessed at that time was a result of forward-looking estimates and not what was attainable at that time, which is what happened to Tesla late last year and early this year.
To worsen it all, at least for critics, Apple’s share price rose to over $100 at the close of the decade. This rise to over $100 per share was a direct result of Apple’s newfound health/balance coupled with the fact that its net income grew by 92% in 1999. I’d like to point out again that its net sales in 1999 were just the fourth best in five years, which is only better than that of 1998. So Apple, like Tesla, hadn’t seen the sales to justify its share price.
In addition, Apple’s rough market cap at that time (with shares outstanding in the region of 180 million using a price in the region of $100 per share) was about $18 billion, which is just a little higher than that of Tesla. With this sort of market cap and share price, analysts and investors, like a fellow Fool, believe that Tesla needs to record annual sales in the region of $35 billion to justify a share price of $100 (assuming that it sells only Model S autos), which is way above what apple recorded in 1999. While I understand that Apple is different from Tesla, and they both operate in different industries, if analysts’ calculations were to be followed, Apple wasn’t worth $100 per share back in 1999.
Foolish thoughts
Perhaps Mr. Market listened to the noise and gave Apple the valuation people thought was right – something in the region of $25 per share. But just over ten years later, Mr. Market realized that Apple was never overvalued and as a result gave it the right value, which is even higher than the value 10 years earlier. Investors who cashed in over a decade ago and never reinvested in Apple before it skyrocketed again definitely have some regrets.
Like in the case of Apple, the easy-to-manipulate Mr. Market could decide to cut back on Tesla and give it a value that people think it’s worth. This recently happened when Goldman Sachs downgraded Tesla’s price target. However, as an investor who looks for long-term investment options, you shouldn’t be deceived and think Tesla is actually overvalued. They come up with (manipulate-able) figures that say Tesla is overvalued and so did Apple’s figures in 1999. As a result of the noise, it could even happen just like it happened to Apple, but I hope you’d always look at the great things Tesla’s future promises – solving one of the world’s greatest challenge in global warming. I’m certain that when Tesla achieves this dream, the end would justify the means.
Finally, I’d like to point out that Tesla’s vision is even better than that of Apple. Apple was never looking to solve any big problem the world was facing and it wasn’t going into a business with its existence next to zero; Apple only wanted to make money by being creative. Tesla, on the other hand, is becoming profitable in a business with its existence hitherto next to zero and also solving a major challenge in the world. I don’t think real value investors would frown at Tesla’s progress.
Criag Adeyanju has no position in any stocks mentioned. The Motley Fool recommends Apple and Tesla Motors (NASDAQ:TSLA) . The Motley Fool owns shares of Apple and Tesla Motors. Criag is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article The Market Is Right About Tesla originally appeared on Fool.com is written by Criag Adeyanju.
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