On the bottom line, most car manufacturers have demonstrated regular and consistent profitability; in contrast, Tesla has reported just one quarterly profit in the company’s history. While Ford Motor Company (NYSE:F) and Honda Motor Co Ltd (ADR) (NYSE:HMC) have used consistent profits to return over 2% per year to shareholders through dividends, Tesla still generates negative free cash flow as it continues to invest in expansion opportunities.
Looking at this peer group, the leader of the pack from a valuation perspective seems to be General Motors Company (NYSE:GM), which boasts the lowest P/S ratio and forward P/E. However, the company’s well publicized plunge into bankruptcy remains in the minds of investors. Until the company’s struggles are further in the rear view mirror, expect it to continue to trade at a discount.
Meanwhile, Ford’s strength in North America is offsetting weakness elsewhere, and new models continue to be well received by consumers. The company currently trades at an attractive P/S ratio of 0.45 and a forward P/E of just 9. Add in the 2.60% dividend yield, and there’s a lot to like even after Ford’s recent share price gains.
The short and long-term conclusions
Looking at the short-term, it is pretty hard to justify Tesla’s current share price even when factoring in the growth opportunity and recent streak of positive developments. Quite simply, there will be a chance to buy shares of Tesla at a lower price than Friday’s closing price of above $97.
With that said, the long term investment thesis is very much intact, and thus far, all evidence points towards Tesla exceeding all initial expectations. As a result, I firmly believe that the share price a decade from now will be well above current levels. To that end, I personally plan to keep a small portion (just over 2%) of my portfolio invested in Tesla for the same reasons that I own shares of Amazon.com despite all traditional valuation metrics indicating that the company is wildly overvalued. Similarly, I will maintain my CAPScall that Tesla will continue to beat the S&P 500 over the long-term.
It is understandable for someone to question why I advocate holding shares of Tesla just a few sentences after saying that the price will likely decline in the short-term. The answer to this question is a matter of investment perspective. I’m not interested in trying to time the market by selling shares of Tesla today with the plan of buying them back at a lower price, mostly because market timing is very imprecise and quite easy to screw up!
Just like Amazon.com, Inc. (NASDAQ:AMZN) and other high-multiple stocks, there will be plenty of volatility along the way; this ties into the high likelihood that there will be a better time to buy shares of Tesla in the near future. However, if Musk’s long-term vision becomes reality, there is plenty of room for Tesla to grow into a market capitalization similar to Ford, GM, or the other major auto manufacturers.
