Tesla Motors Inc (NASDAQ:TSLA) shares have risen dramatically over the past year. Now, after turning its first profit, it is trying to build the electric “gas” station infrastructure needed to support wider adoption of its all-electric cars. That’s a great idea, but the stock is too expensive.
Gasoline powered cars are the main form of transportation around the world. Over decades of use a deep infrastructure has been built up in support of gasoline. That system goes from pulling oil out of the ground to putting gasoline into passenger cars. All of that took a long time and a lot of money to create. Alternate fuel sources have to compete against that infrastructure as well as the gasoline-focused auto industry if they want to be considered a legitimate rival.
Hard to love
Tesla Motors Inc (NASDAQ:TSLA)’s electric cars are currently more of a novelty for the rich than a mass market product. There are good reasons for this. The first is that the cars Tesla sells are expensive, costing close to $100,000. A second reason that Tesla Motors Inc (NASDAQ:TSLA)’s cars aren’t likely to get broader acceptance is limited range. Since the car has to be plugged in to charge and there are very few public charging stations around, the distance issue is a big stumbling block. That’s especially true for a luxury priced car. After all, why spend more money for a less capable car?
Tesla Motors Inc (NASDAQ:TSLA) just announced its first quarterly profit and its shares have risen to new highs. While turning profitable is exciting, Tesla shares are being afforded a valuation way in excess of its entrenched auto peers. Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) have price to earnings multiples in the high single digits. Even if you generously assume that Tesla earns twice what it made in the first quarter in each of the next four, its P/E is still over 10 times higher than that.
Investors are pricing Tesla as if its all electric cars are going to replace gasoline-powered cars overnight. That simply can’t happen and investors are likely to be disappointed when results don’t live up to the market’s grand expectations.
Pushing the accelerator
Tesla is aware of the range problem. Bloomberg recently reported that the company is looking at “tripling the area covered by solar-powered ‘supercharger’ stations so that owners of the Model S sedan can drive to New York from Los Angeles, according to Musk, Tesla’s chief executive officer…”
Essentially, Tesla Motors Inc (NASDAQ:TSLA) plans to build the electric “gas station” network needed to support wider adoption of all-electric vehicles. That’s a good long-term decision for the industry, but building out an infrastructure to support electric cars is going to be expensive. Investors need to question if the company can remain profitable and build out this support network.
Natural gas has been increasingly used as a fuel source for vehicles. However, its proponents aren’t going after the consumer market. For example, more than 80% of Waste Management, Inc. (NYSE:WM)‘s new garbage trucks are powered by Natural gas. It has around 40 natural gas-fueling stations, with plans to build dozens more.