Why I Think Tesla Motors Inc (TSLA) Is a Terrible Investment

Tesla Motors Inc (NASDAQ:TSLA) is a polarizing stock. Bulls worship Elon Musk and bears are sickened by what they see as a supremely overvalued company. I count myself among the bears. Analyze the facts as you will. But be aware that any premise for investing in Tesla that sounds like “Elon Musk is the greatest,” or “Tesla is the next Apple” isn’t a strong argument.

Price matters

To quote Ben Graham from The Intelligent Investor, “In his endeavor to select the most promising stocks either for the near term or the longer future, the investor faces obstacles of two kinds… He may be wrong in his estimate of the future; or even if he is right, the current market price may already fully reflect what he is anticipating.”

A stock will not prove a promising investment if you pay too much for it. For those who are willing to pay almost anything for Tesla Motors Inc (NASDAQ:TSLA), I ask you this: would you pony up $500 billion dollars to buy the company? How about $1 trillion?

If someone can prove that investing in a Tesla valued at $1 billion is just as attractive as investing in a Tesla valued at $10 billion, please enlighten me.

Fun with numbers

Tesla Motors Inc (NASDAQ:TSLA)’s current market valuation is $14.1 billion. Assume that you want to receive a 10% return on Tesla for the next 30 years. Assume you believe that a stock’s performance is inextricably linked to the performance of the underlying business. In that case Tesla must generate, on average, $8 billion in profits for each of the next 30 years.

If you want a 10% CAGR for the next 30 years your investment must grow by a total factor of 17.45 (1.1 to the power of 30). Tesla Motors Inc (NASDAQ:TSLA)’s market cap of $14.1 billion times 17.45 = $246.045 billion. That number divided by 30 = $8.2015 billion.

No company in the automotive industry has even come close to generating $8 billion in average profits over a 30 year span.

Toyota Motor Corporation (ADR) (NYSE:TM) generated $8.72 billion in net income on average from 2003-2012. That is over the $8.2 billion you’d need from Tesla over the next 30 years. But Toyota did not generate that much on average in the two decades preceding the last.

Toyota dropped its plans for an all electric mini-car last September. The company noted difficulties associated with battery technology that is still in its infancy. Toyota Motor Corporation (ADR) (NYSE:TM) is realistic enough to know that the technology won’t be economical to produce on a mass scale for several years.

An interesting Chinese alternative

Too many people are neglecting other companies in the electric vehicle space that will be tough competition for Tesla Motors Inc (NASDAQ:TSLA). One very interesting name in the sector is BYD Company.

BYD is the dominant electric car maker in China and it seems fascinating (read its 2012 annual report here). Sales have grown at a 13.5% CAGR over the past five years and cash flows from operating activities have grown at a 21% CAGR over the past three years. Shareholder’s equity is currently $3.67 billion (more than the company’s market cap). BYD has multiple years of profitability under its belt, whereas Tesla Motors Inc (NASDAQ:TSLA) has one quarter.