Elon Musk made his name with PayPal (EBAY) before moving on to become the Chairman of the Board at SolarCity (SCTY) and, more visibly, the face of Tesla Motors (TSLA) . Musk is something of a celebrity, most recently making the news by offering up plans for a high-speed rail system to the state of California, and his celebrity has helped bring exposure to Tesla’s line of luxury vehicles. And 2013 has proven to be the year of Tesla.
With superb reviews for the company’s signature sports car, the $109,000 Roadster, and positive buzz about the Model S, a sedan designed to compete with luxury vehicles like BMW’s ($BMW) 5-series, shares of Tesla started taking off, more than quadrupling in value since the start of the year.
Tesla, though, has become the very definition of a battleground stock as a vocal chorus of critics will point out the company earnings continue to lag way (WAY) behind its share price. And so the classic question arises again: is Tesla an excellent growth buy or a terrible value buy? There’s no certain answer, and only time will tell for sure, but here’s a few arguments for both sides.
The Bull’s Case
Tesla Model S
The Model S, currently priced at around $70,000, has been getting rave reviews: winning Car of the Year from Motor Trend and Automobile Magazine as well as picking up the 2013 Green Car of the Year Award. And this represents the just first step towards reaching a far broader audience. And with the Model S coming in at almost $40,000 less than the Roadster, it's also part of a long-term plan that leads to eventually offering sedans for $35,000 a year with all the technological shine of the Model S. The Model S was already the best-selling plug-in electric car in the United States in the first quarter of 2013, outpacing the Chevy (GM) Volt and the Nissan (NSANY) Leaf despite costing at least twice as much as either car. If/when Tesla hits their projected price point, they'll be able to reach a much broader audience and can expect to move a lot more cars than the 20,000 or so they’re expected to sell this year.
When comparing Tesla’s offerings to traditional vehicles, there’s an important factor to consider: Uncle Sam providing consumers with a helping hand. On account of the American Clean Energy and Security Act of 2009, anyone purchasing an electric car can make use of federal subsidies of up to $7,500, depending on the car’s battery life. And every Tesla model has a battery that allows for the maximum credit. What’s more, some states have laws offering up even more, making the combined credit up to $12,500 in California, $11,500 in Illinois, $12,500 in Georgia, $13,500 in Colorado, and a $15,000 in West Virginia. After recovering from the relative shock of finding out electric car buyers in West Virginia are getting the biggest subsidy in the country, one might note that a $12,500 bonus for going with an electric vehicle in California, the biggest car market in the country, gives Tesla a chance to be extremely competitive in that market.
California electric car credits
In addition to being able to offer up to $12,500 to consumers purchasing a Tesla in California, Tesla’s making additional profits from selling electric car credits to other manufacturers. The California Air Resources Board (CARB) intends to have 15 percent of all cars offered in the state be Zero Emissions Vehicles (ZEVs) by 2015. As they ramp up to that goal, they’re enforcing a schedule that forces car manufacturers to meet these standards and, if they don’t, purchase ZEV credits from companies that have them to spare. This means Tesla can make additional revenues by selling credits to other car makers, something Thilo Koslowski, an auto industry expert with Gartner Group, estimates will bring in $250 million.
The Bear’s Case
Stock price is just too high
Deutsche Bank (DB) analysts upgraded Tesla from hold to buy on July 26, raising their price target by $110 a share to $160. While updating the price target from $50 a share may have seemed a tad obvious given that shares had already hit $110 by that point, $160, almost 50 percent over the current share price, probably seemed pretty optimistic at the time given the incredible run the company had already gone on just to get to that point. Today, though, the share price has cleared $182. Deutsche Bank analysts have since revised their price target up to $200 a share while reiterating a buy, but it still seems eminently possible that the current stock price is unsustainable. The fundamentals remain pretty spotty across the board as a result. Debt to equity ratio is 0.94, and the price to book ratio of 34.21 is way too high for a company that manufactures cars. Even if one believes Deutsche Bank’s bullish estimates that earnings will reach $2.10 per share in 2014, that would still put the ratio of stock price to earnings at over 88.
The big bird, an affordable electric car, is still in the bush
Tesla certainly seems certain that they’ll have a $35,000 sedan with a 200-mile range on the roads in the next few years, but until they actually do it it’s hard to be completely confident that the company will ever reach earnings on par with the current share price (something that many would say is impossible either way). Given that this major milestone remains a hypothetical, there’s reason for skepticism.
Many traders remain bearish, and dilution is inevitable
It’s not just analysts who remain skeptical about Tesla. There are plenty of traders with skin in the game thinking the company’s going to take a tumble. With a short float of over 27 percent, more one out of every four shares of Tesla is tied to a bet that the company’s due for a market correction.
And, speaking of options, there are 25 million currently outstanding for Tesla stock. When the company rolls out its 10,000 Model S later this year, it will trigger a performance target that makes an additional 1 million options exercisable. All told, 11.2 million of those options will be exercisable by the end of the year and, given that the highest strike price on any of them is $36.01 (almost $150 below the current share price), it’s a pretty obvious bet that all of these will be exercised (unless someone just forgets about their millions of dollars in available stock options). With just 121.45 million shares currently outstanding, these options represent a considerable dilution of an already very expensive stock.
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