On one hand, the bulls believe Tesla is the next Apple, and on the other hand, the bears believe Tesla Motors Inc (NASDAQ:TSLA) will be bankrupt in the next 5 years. To use a baseball analogy, Tesla is the Yankees, either you love them or you hate them. There is no in-between. With Tesla shares near an all time high, should investors buy the stock?
Fundamentals
Tesla Motors Inc (NASDAQ:TSLA) makes a fantastic car. The model S goes from 0 to 60 in 4.2 seconds. It is fully electronic with 265 miles of range, looks great and handles beautifully. It was Motor Trend’s 2013 car of the year.
Source: http://www.autoblog.com/2012/09/11/2012-tesla-model-s-first-drive-review-video/
Valuation-wise, Tesla shares are pretty pricey. They trade at 136 times next year’s earnings and have a book value of only $1.47. Despite the shaky tangibles, Tesla Motors Inc (NASDAQ:TSLA) has great intangibles that don’t show up on the balance sheet.
The number one intangible for any company is the CEO, and for Tesla, it has one of the best CEO’s in the world. Many people believe that Elon Musk is the next Steve Jobs. Just as Steve Jobs revolutionized multiple industries such as entertainment, computing and mobile phones, Elon Musk has and is destined to revolutionize many industries such as online payments with Paypal, electric cars with Tesla, and space travel with Space X.
The number two intangible is that Tesla Motors Inc (NASDAQ:TSLA) has an extremely low cost of capital and can use that money to grow faster. Tesla managed to raise almost $1 billion in a mix of equity and debt on May 16. Its five-year convertible bond was issued with a coupon of only 1.5% with a stock conversion at $125. In contrast, the 10-year US Treasury Bond is yielding 2.56%.
The number three intangible is market size. The overall car market does $1.5 trillion in annual sales and pure electric vehicles are predicted to take anywhere between 5 to 10% of that market by 2020. With a potential market size of $200 billion, Tesla Motors Inc (NASDAQ:TSLA) has plenty of room to grow.
Analysts are indeed expecting great growth. Tesla’s next 5 year’s growth is expected to be 33% a year.
Looking ahead to second quarter earnings
For the second quarter, Tesla Motors Inc (NASDAQ:TSLA) is not expected to post a profit due to its new lease-financing plan. The lease-financing should help sell more cars but will drag on profits. General market expectations are that Tesla should be manufacturing at least 500 cars a week and making progress in building out its supercharger network which provides Tesla owners half a charge in 20 minutes. Tesla has said that by fall 2013, it expects to build out supercharger networks in most metropolitan areas. In addition, investors are expecting progress to be made in selling cars in Europe and Asia.
Versus competitors
Right now Tesla Motors Inc (NASDAQ:TSLA) is in a sweet spot. Tesla’s former competitor, Fisker, has gone bankrupt, leaving Tesla alone in the high-end electric car market.
| Tesla | GM | Ford | Advantage | |
| Market Cap | $15 billion | $50 billion | $67 billion | Ford |
| Price to Book | 88 | 1.80 | 3.79 | GM |
| Forward P/E | 143 | 8.31 | 9.95 | GM |
| EPS Next 5 Years | 32.90% | 15.93% | 11.90% | Tesla |
Source: Finviz
Looking at the numbers, Ford Motor Company (NYSE:F) is the largest by market cap and General Motors Company (NYSE:GM) is the most fairly valued, but Tesla has the most growth.
Going by valuation metrics, Tesla Motors Inc (NASDAQ:TSLA)’s price is very rich. Tesla’s price to book ratio is over 20 times that of Ford and General Motors Company (NYSE:GM) while its forward price to earnings ratio is at least twelve times. For a company that is only expected to produce 20,000 to 30,000 cars a year, having a market capitalization of 1/3rd the size of General Motors Company (NYSE:GM) is extraordinary. GM and Ford Motor Company (NYSE:F) have been around for over half a century. They sell millions of cars each year, have significant dealer relationships, customer loyalty, and a long list of patents. They have R&D budgets that dwarf the total amount of money Tesla Motors Inc (NASDAQ:TSLA) has ever spent. General Motors Company (NYSE:GM) alone spent $8 billion in research and development in 2012 while Tesla has raised less than $2 billion of total capital in its entire lifetime.
The great majority of Tesla’s market capitalization is due to Tesla Motors Inc (NASDAQ:TSLA)’s potential, and with the automotive industry size in the trillions and a fantastic product in the model S, it certainly does have a lot of that.
Conclusion
The future of Tesla is still uncertain. On one hand, the company is overvalued by every fundamental metric, and on the other hand, Tesla Motors Inc (NASDAQ:TSLA) has many intangibles that could make it the next Apple. The stock has shown incredible relative strength during the recent market correction and it seems as if Tesla will test 52 week highs again. Investors should be careful though, because like Tesla Motors Inc (NASDAQ:TSLA)’s prospects, Tesla’s stock is equally uncertain. It is better to stay on the sidelines and just enjoy the show.
The article Tesla: Should Investors Buy Into the Bullish Sentiment? originally appeared on Fool.com and is written by Jason Bond.
Jason Bond has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors Inc (NASDAQ:TSLA). The Motley Fool owns shares of Ford Motor Company (NYSE:F) and Tesla Motors Inc (NASDAQ:TSLA). Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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