The last time we wrote about Tesla Motors Inc. (TSLA.O), the non-institutional true believers flamed us for having the gall to question valuation. “Valuation doesn’t apply to growth stocks” was the refrain, as though trying to educate a slow child. Sorry, I don’t agree. All stocks have a fair value. That’s a law of investing – however uncomfortable it is for growth at any price (GAAP) investors.
However, when evaluating a new technology – whether it’s 3D printing, wearable technology, the Internet Of Things (IOT), social media or whatever – remember that there’s a difference between creating a product with a huge moat around it and merely being first to market. Let’s look at the only pure play electric car manufacturer.
Source: Thomson Reuters Eikon/StarMine
Plugging it in
The Intrinsic Value chart highlights the difference between the traditional internal combustion engine manufacturers (OK, they build some hybrids) and Tesla. Let’s use the smartphone analogy. As people switched to smartphones from Apple and HTC, BlackBerry was crushed.
Perhaps the same thing will happen to electric cars, however the key point I’d make is that it’s often not the first to market that ultimately wins. Other electric car manufacturers may come along and make some new discovery that gives them an edge. The problem for the investor is that the uncertainty of the future simply isn’t reflected in the stock price and flawless execution and market share gains are all but implied in the current valuation.
Source: Thomson Reuters Eikon/StarMine
Looking down the road
A counterargument would be that the P/E multiple is down at the bottom of the range for the last two years at “only” around 80 times. This is one of those cases where you understand the analyst wanting to go with the ‘hold’ recommendation. Tesla could succeed and change the world in the same way Apple changed (or at least deflected) the development path of smartphones, or the way Facebook and LinkedIn changed how people connect.
The challenge is what do people expect to happen here? The I/B/E/S consensus for December 2014 is $0.98 of EPS, whereas StarMine is forecasting only $0.93. Remember, the StarMine approach puts more weight on the recent estimates and the better analysts. Either the consensus has to go down, the SmartEstimate has to go up – or a big miss will create some volatility around reporting time. Note that right now there’s very little predicted surprise forecast on the revenue line, which is arguably much more important in this high-growth phase.
Source: Thomson Reuters Eikon/StarMine
Source: Thomson Reuters Eikon/StarMine
Coming up short
Whatever current expectations are, clearly many institutional investors think they’re too high, with TSLA in the bottom 3% on the StarMine Short Interest model. Short interest has been elevated for over a year now with no significant win for speculators – but even the stopped clock ends up being right twice a day.
Note: The author may have a position in the stocks discussed in this article.
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