Tesla Motors' (TSLA, Financial) recent rally has propelled it farther into the ranks as one of the market's most overvalued stocks. People have alternately claimed Tesla is a technology company, industrial company, auto parts supplier or just a car manufacturer. No matter how you classify it (and I believe it’s largely a car company), the stock is overvalued.
Tesla stock currently trades at 8.1 times sales with a forward P/E of 104. Given the enormous upfront investments Tesla is making in designing and building new vehicles, it is not really generating substantial earnings so price to sales is a better valuation metric. However, we are including forward P/E comparables just for informational purposes. We took a look at the valuations of six leading companies across four different industries to see how Tesla compares.
In the technology sector we looked at behemoths Apple (AAPL, Financial) and Microsoft (MSFT, Financial) as well as the seemingly jack of all trades, IBM (IBM, Financial). We also added in Alphabet (GOOG, Financial)(GOOGL, Financial), Qualcomm (QCOM, Financial) and Facebook (FB, Financial).
Despite all of these companies having low capital requirements and generally generating huge profit margins, Tesla still trades at a level more expensive than all but Facebook. It’s hard to see how you could even draw parallels between Tesla’s business and that of the six companies we chose.
Probably the most realistic charitable comparison for Tesla is that of a general industrial company, a company that produces finished capital goods, industrial parts, does contract manufacturing for other companies and even does a little software work. We chose six large diversified industrial companies to compare Tesla’s valuation against.
As you can see Tesla is not even trading close to these levels. Given that Tesla is an auto parts (electric power trains) and auto manufacturer, the best comparable is probably fellow auto parts companies and auto manufacturers.
These comparables are even more unkind to Tesla’s valuation!
Now some of you are probably shaking your heads at my stupidity, and I know what you’re thinking. What about growth rates? Tesla is growing a lot faster than Ford (F, Financial) or Johnson Controls (JCI, Financial); therefore it should be valued higher. That is a valid point. So let’s see how Tesla stacks up against two high growth software companies.
The table below shows Alphabet’s, Facebook’s and Tesla’s five-year compound annual growth rate and year-over-year growth rate in revenue and profit (operating income for Alphabet and Facebook, gross profit for Tesla).
Here is where things get a bit more nuanced. While Tesla easily outperforms both Alphabet and Facebook in five-year growth rates, we have to keep in mind that Tesla is growing off a small base of just $204 million in revenue in 2011 while Alphabet (Google back then) was a mature company generating $38 billion in revenue in 2011. Even Facebook was farther along in its life cycle, generating $3.7 billion in revenue.
When looking at year-over-year comparisons, things are less rosy for Tesla. Its growth rate is slowing noticeably while Facebook’s growth rate is accelerating and Alphabet’s is relatively the same. Keep in mind that Tesla still doesn’t generate any meaningful profit while both Facebook and Alphabet are enormously profitable.
Almost impossible to justify Tesla’s stock price
Tesla’s valuation is even more ridiculous when you look at what Tesla would need to do to justify its current stock price. Tesla’s enterprise value (equity plus net debt) is approaching that of U.S. heavyweights Ford and General Motors (GM, Financial).
Note for our enterprise value with calculated net debt as long-term debt related to automotive operations less marketable securities: We did not make adjustments for cash which we considered part of working capital, and we did not include debt related to automotive financing operations.
In order for Tesla to earn its valuation and trade at the same enterprise value to vehicle sales ratio as the average of Ford and GM, it would need to grow vehicle sales at a compound annual rate of 28% over the next 20 years. Last year there were 17.8 million vehicles sold in the U.S. and 88.9 million vehicles sold worldwide. Tesla would need to reach an annual sales run rate of around 6.6 million vehicles! It does not even look like there is room in the global market for Tesla to grow to that size. Additionally Tesla’s year-over-year sales growth for this year was 26.5%; that is below the 20-year growth rate Tesla would need.
Summary
Whether you are valuing Tesla as a car company, industrial company or technology company, the stock looks overvalued. The projections baked in to Tesla’s stock price about future sales growth are virtually impossible to meet. There looks to be simply no way anyone can construct a reasonable valuation model that would justify Tesla’s current price.
