Imagining a World Where Tesla’s Valuation is Justified

Jacob Harper |

Since Tesla Motors (TSLA) began its run-up in April 2013, analysts have wondered how long a company can run on promises and dreams. Tesla embarked on its ascent that month in auspicious fashion, revealing that it was, for the first time in its history, a profitable venture.

Their short, wild history of profitability is worth looking at from that beginning. The announcement of federal tax credits applicable to Tesla owners were also an incredibly welcome development, one that would in the words of Tesla CEO Elon Musk make their cars “affordable to a much broader audience than people think is usually the case.”  

The market responded emphatically, with shares breaking $40 for the first time in its history, giving investors a hint of what the stock was capable of doing.

Tesla Price Check

Two days after the announcement Tesla experienced their first bubble pop, albeit a small one.  Ben Schuman of Pacific Securities wrote “we do not think the new financing arrangement lived up to the hype -- and related stock move.”  

Tesla skeptics began amassing a sizable short position – one they were eventually squeezed out of. For after that small price check, Tesla’s stock kept soaring. By May, it had doubled. By August, it had doubled again. By late September, Tesla had become the undeniable darling of the tech sector. Deutsche Bank raised their guidance 25 percent. Northland put their price target at $230, eight times what the company was worth in March.

There and Back Again

The Tesla bubble popped in October on a couple of worrying developments. One, videos of Tesla car fires spooked investors, although they were not directly attributable to Tesla’s design and were not really statistically significant.  Two, the fundamentals became too much to bear: a price-to-book ratio of 34 (now 42) can overcome some pretty substantial hype. This fundamentals problem was hammered home in a poor Q3 earnings report in November.

After experiencing a considerable correction in late 2013, Tesla is on the rise again. By midday on Feb 18, the day prior to their first earnings report of 2014, the carmaker hit an all time high of $205 a share. This was occasioned in part by rumors of a meeting between the acquisition team at Apple Inc. (AAPL) and Musk, spurring investors wild imaginations of some sort of union between the two.  

But the pop can mainly be attributed to what has always propped up Tesla: their nearly year-long history of overcoming skeptics armed with fundamental data with more profits, better guidance, and that “wow” factor that can keep a tech company chugging along seemingly indefinitely.

With Tesla at a valuation far beyond what they can feasibly justify with revenue or profits, it’s easy to dismiss the company. And like the company experienced back in September, the shorters are out, with the carmaker carrying a float short of 35 percent heading into earnings.

How Tesla Can Stay Supercharged

For Tesla to experience even more growth and prove the bears wrong yet again, they’re going to have to pull out one hell of a surprise. It’s hard to imagine a market that is less impressed with Tesla and Musk. But it’s not impossible to imagine a scenario in which Tesla defies the short sellers once again.  

For one, Tesla is going to have to pull in some real, hard numbers. With a forward P/E of 124, moving even more than the 6900 vehicles expected is a necessity. The “battery problem,” that is, the lack of an adequate amount of electric car batteries, also must be addressed.

But fundamentals are just a part of it. For Tesla to keep their gains after earnings, Musk and his cohorts are going to have to drop something exciting. Investors will be looking for any news on developments of the lower-end Model X, to be sure. Positive guidance on the Model X should keep them going.

But to really get the stock to continue soaring, Tesla is going to have to drop a game-changer that further expands its reach into the mainstream.  The new product doesn’t need to be revolutionary, just highly useful, like their quick-change battery stations.

To maintain this fantastic run, Tesla will need something to keep investors believing that, profits be damned, its product isn’t just a curio for the rich who can put up with the high price tag and inconveniences of driving an electric car. Rather, they need  to prove that they are actively developing the infrastructure to support the Tesla bull’s gut feeling that the company is truly the future of the automobile industry, and worth every penny of their market value.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TSLA Tesla Motors Inc. 185.85 -0.95 -0.51 3,391,936
AAPL Apple Inc. 109.95 0.84 0.77 26,196,709
AILIO Ameren Illinois Co Pfd 4.26% 99.51 0.00 0.00 0

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