As we rapidly approach the official start of spring, car buying season is going to heat up along with temperatures across the United States. Tesla Inc. (TSLA, Financial), however, has cooled down almost 70 points from my last article in August. In early August, Tesla CEO Elon Musk took to Twitter (TWTR, Financial) to talk up going private. At the time, guru investor Ron Baron (Trades, Portfolio), who owns $570 million worth of Tesla shares, said it was “a good thing for the company.” He still has 2.8% of his portfolio in the stock. Of course, that seemed to be just the media hype around Musk, who just one month later appeared on Joe Rogan’s podcast.
Since then, it seems the fearless leader has been battling with the securities regulators over more tweets. Anyone doubting the power of Twitter still? No one is talking about that crazy rant some CEO or celebrity had on Facebook. Musk is a true believer in his company. In fact, he’s been the only insider buying the stock over the last year. However, if we are headed to a “peak car” scenario, Tesla’s production numbers will be meaningless.
With a $40 billion market capitalization, the better bet on this stock is not for its cars - it’s for its batteries, solar energy and technology capabilities. Cars aren’t like a cell phone, which has become the platform of our daily lives. Cars are just tools, and becoming less necessary.
Tesla as a technology company trading at 2.3 times sales, 10 times book and 50 times next year’s earnings makes sense. The company selling $50,000 cars and losing $976 million a year with capital spending exceeding $2.3 billion and total long-term debt close to $14 billion - not so much. Of course, that’s not stopping it from trying.
In February, the long-awaited $35,000 Model 3 became available, with deliveries starting this month. The car is only available in black and, in an effort to save some of its cash during the production of its automobiles, Tesla is closing all of its stores and moving to an online-only sales platform. The company expects the move to enable a 6% price cut across its lineup. Buying a car online is definitely the right move, but some (maybe a lot of) people still want to sit in and test drive the car before buying. Of course, for many, the list of options and features on your basic Volkswagen is overkill, while others (especially sales people) see it as an opportunity to personalize the car to its owner. Tesla is taking a gamble by moving away from show rooms, despite the generous one-week, 1,000 mile return policy.
Tesla has plenty of reservations to make its Model 3 a success and while no one should bet against Musk long term, what happens when these models become outdated? Car companies are always coming out with new changes to the body and interiors of their vehicles and today’s Tesla will need to iterate much faster in the future to compete as all the luxury auto manufacturers are now gearing up for the electric future. If it pivots, it may be worth owning, but as a car company, it's still overvalued.
Disclosure: I am not long or short any stocks mentioned in this article.
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