Tesla Motors Debate: Buying Opportunity or Bubble Stock?

If you cannot view the embedded video, please click here.

I joined CNBC’s Kelly Evans and Bill Griffeth and Stifel Nicolaus’ James Albertine yesterday for a lively chat on Tesla Motors (TSLA).  James takes the view that, after its recent correction, Tesla is an attractive stock.  While I share James’ enthusiasm for Tesla’s technology, I continue to believe the stock is far too expensive for anything other than a short-term trade.

Tesla has taken a beating of late, down about 10% from its recent all-time highs following comments from founder Elon Musk that the stock price was “kind of high right now.”  But even at today’s prices, Tesla trades for 13 times sales—a lofty valuation for any stock, but particularly one with a market cap of $32 billion.

James noted that this is not the first time Musk has made comments about Tesla’s stock price being overvalued; Musk made similar comments in October of last year, when the Tesla stock was trading at around $170 per share. At time of writing, Tesla’s share price was nearly $100 higher.

James also makes the very good point that Tesla really has no competition in the niche for high-end electric vehicle segment.  While that may be true, it also raises a point: How big is the market for luxury electric vehicles? I would argue that, due to practical concerns, this will remain a small, niche market for a long time to come: a hobby car for auto enthusiasts and wealthy techies. For most people, a Tesla auto would be a second car, not their primary vehicle, due to battery life issues.

As an example, I regularly drive from Dallas to Houston on business, a trip of about 250 miles door-to-door.  A Tesla Model S couldn’t get me there on one charge.  Assuming a driving speed of 70 miles per hour and an outside temperature of 90 degrees, Tesla estimates that I would get 180-229 miles on a single charge.  I tend to drive fairly aggressively—this is Texas, after all—so the figures are probably lower.

It takes an hour and twelve minutes to charge a Tesla battery.  That means my three and a half hour business trip gets lengthened to nearly five hours each way.

Again, I’m not bashing Tesla’s technology.  Personally, I think it’s incredible.  But I’m also realistic enough to know that it’s impractical for most drivers at this time, irrespective of cost.

Kelly made the point in the debate that Tesla is less an automaker than a technology company.  That is certainly the view on Wall Street, but at the end of the day Tesla is, in fact, selling cars.  Let’s see how Tesla stacks up to the competition.

AutomakerTickerPrice / SalesMarket Cap / Vehicles Sold
General MotorsGM0.33$5,500
Tesla MotorsTSLA13.00$914,000

Daimler (DDAIF) and BMW (BAMXF) are two of the world’s premier automakers.  These are the companies that I would consider to be Tesla’s competition.  But let’s throw General Motors (GM) and Ford (F) into the mix too, just for grins.

Daimler and BMW trade at a premium to Ford and GM based on their price/sales ratio, which is what we would normally expect.  But all of these traditional automakers trade for well below 1.0 times sales.

Tesla?  Tesla trades for 13 times sales—24 times more expensive than Daimler based on this metric.

Now comes the fun part.  The last column divides the current market cap by the number of cars sold annually.  Again, Daimler and BMW command a large premium to GM and Ford.  But do you happen to notice one large outlier?

Assuming Tesla meets its goal of selling 35,000 cars this year, investors are assigning a valuation of $914,000 per car. Lowly General Motors is being valued at barely $5,500 per car, and Daimler commands $56,000.

Finally, let’s look at one more metric: market cap. Tesla’s market cap is about $32 billion.  Daimler and BMW have market caps of $88 billion and $76 billion at current exchange rates.

Does it seem reasonable that Tesla is worth fully 36% and 42% of Daimler and BMW’s valuations given that its annual unit sales equal about 2% of Daimler or BMW’s unit sales?

Not to me.

Bottom line: Tesla is a fine company.  But it’s a terrible stock at current prices, or at least as a long-term holding.  If you insist on trading Tesla, keep your time horizon short and have good risk management in place.

Charles Sizemore is the principal of Sizemore Capital Management. As of this writing, he had no position in any security mentioned.