Tesla (TSLA, Financial) may never live up to the hype and sizzle of the brand at the current price level.
Tesla’s current valuation is predicated on it earning at least $32 billion in net income through its future operations. I don’t see that happening in the next 10, 15, even 20 years, and thus (for me, at least) it’s far more overpriced than overvalued.
Tesla has a strong brand yet the company has a larger market capitalization than Fiat Chrysler (FCAM, Financial), Ferrari (RACE, Financial) and Porsche (XTER:PAH3, Financial) combined, all excellent companies. Fiat alone did $571 million in net income last year yet Telsa is valued higher than these major automakers even though it has never turned a profit and might not for some time.
More importantly, while the founder and CEO Elon Musk is a genius inventor, builder and manager, he seems to have way too many irons in the fire:
- Telsa.
- Solar City.
- SpaceX.
- Divorce pending.
Telsa will surely face tougher competition going forward and will be forced to continue pouring money into innovation and R&D to compete. This will eat shareholder returns and company cash flow. This is a story about economic value versus social value.
The future is going to be amazing from a social standpoint with clean energy cars running cheaper and longer. Maybe the long long term will show that Tesla is worth $64 billion, but to pay $32 billion (at $224 per share) today, shareholders will have to wait a long time and endure a bumpy ride.
Financial analysis
Even if the optimistic analysts are right about Tesla earning $6 per share in 2018, that’s 37x a speculative estimate, and $6 seems like a big number to reach in the next two years. That would put the net income at ~ $875 million.
To accomplish this, Tesla would need to get its SG&A costs down, way down, and spend far less on R&D, which it simply cannot do at this point. With a 22% gross margin rate, there’s no way the profit estimates.
Let’s say the company achieves 50% year-over-year growth, selling ~170,000 cars in 2018. Even if all of these vehicles are Model S, it’ll generate more than $13.7 billion in sales. With the current margins, that’ll leave $3 billion for operating costs, R&D and taxes (if profitable). No way they get to $6 a share in this scenario.
Analysts' take
In fact, Morgan Stanley (MS, Financial) recently cut its 2016 EPS estimates to -2 cents from 68 cents and 2017 estimates to 35 cents vs. $1.14. Morgan Stanley left its estimates largely unchanged; ~70,000 units in 2016 composed of ~16,000 Model X and ~54,000 Model S units and by 2018 ~108,000 units.
Tesla has made a key hire in former Audi (XTER:NSU, Financial) executive Peter Hochholdinger, who had a long history with Audi, with the latest post as director of production for the A4/A5/Q5 models. Hochholdinger is taking over as the new VP of Vehicle Production, responsible for the Model S and Model X and scale-up on the upcoming Model 3. This is a strategic hire that could lead to future operational cost efficiencies, but that and turning a profit at this point is anyone’s guess.
The stock is all hype and sizzle at this point, one that you should not get involved in.
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