Here’s a curve ball. What if, in the world of excellent businesses, past performance was often an excellent indicator of future performance. That’s at least how the market seems to feel about LinkedIn Corp (NYSE:LNKD) and Tesla Motors Inc (NASDAQ:TSLA), two businesses that are clearly firing on all cylinders. As if these stocks weren’t already expensive enough, they’ve crushed the market’s returns over the last 12 months, leaving both stocks trading at astronomic valuations. Let’s put the market’s expectations to the test, and take a look at just how powerful some of these growth drivers really are.
Tesla Motors Inc (NASDAQ:TSLA)
Investors who filter investments with valuation metrics, such as the price-to-earnings ratio and price-to-sales ratio, will find that their analyses won’t last very long on Tesla. The metrics just don’t make sense: a forward P/E ratio of 115, are you kidding? But it’s just as difficult to wrap your mind around Tesla Motors Inc (NASDAQ:TSLA)’s sales growth of 83% from the fourth quarter of 2012 to the first quarter of 2013.
Though Tesla may have already snapped up a meaningful share of the luxury car market, the company is just getting revved up. If CEO Elon Musk’s timetable of three to four years for a $30,000 electric vehicle is correct, then he thinks that Tesla Motors Inc (NASDAQ:TSLA)’s annual sales may soon increase from about 20,000 vehicles per year to several hundred thousand per year.
While the potential for mass acceptance of an affordable car is Tesla Motors Inc (NASDAQ:TSLA)’s main growth driver, the company relies on a few other strengths worth noting.
As the company continues to streamline operations and achieve greater scale, profitability could improve substantially. From December to March the company was able to reduce the time to build a car by almost 40%, and Tesla CFO Deepak Ahuja said in the first quarter earnings call that he thinks that “there’s clearly room to go further, and there are a lot of activities in our manufacturing organization that are continuing in that direction.”
Also, Tesla is currently only sold in North America. The company believes that when it does begin to deliver vehicles outside of the United States, there could be significant upside potential.
LinkedIn Corp (NYSE:LNKD)
What happens when you combine a powerful network effect, colossal growth, and massive market opportunity? You get an opportunity of a lifetime. To grasp the scale of the potential in this stock, consider a few numbers.
Two new users every second. LinkedIn Corp (NYSE:LNKD) is growing fast. Even better, with every additional user, the social platform becomes even more useful and valuable.
$167 million. That’s the amount of free cash flow LinkedIn Corp (NYSE:LNKD) generated on $1,109 million in sales in the trailing 12 months. LinkedIn Corp (NYSE:LNKD) is a cash cow — already.
72%. From the year-ago quarter, that number marks the company’s revenue growth in the first quarter of 2013.
200,000. That’s the estimated field of corporate clients for recruiting services, of which only about 18,000 are using LinkedIn Corp (NYSE:LNKD). Recruiting accounts for 57% percent of LinkedIn’s revenue, and it also happens to be the company’s fastest-growing segment, up 80% in the first quarter of 2013 from the year-ago quarter. So you can confidently expect LinkedIn will continue to grab a larger share of this market. Talk about growth opportunity.
Some stocks are worth their premiums
Don’t turn your back on a stock simply because it looks overvalued. Take a closer look; some companies really have superior growth prospects, deserving of extreme valuations. But is the market getting a little too excited? Or do you think Tesla Motors Inc (NASDAQ:TSLA) and LinkedIn are among the rare stocks that actually deserve their unthinkable valuations?
The article Understanding the Meteoric Growth of LinkedIn and Tesla originally appeared on Fool.com is written by Daniel Sparks.
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Tesla Motors (NASDAQ:TSLA). The Motley Fool owns shares of LinkedIn and Tesla Motors.
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