I’ve done very well by Elon Musk, at least in the past few months. But is it coming to an end?
Tesla Motors Inc (NASDAQ:TSLA) and SolarCity Corp (NASDAQ:SCTY) both have prominent places in my portfolio, and unless you’ve been living under a rock this month, you know how that’s turned out for me, and I hope for you, too. For those not taking score at home:
The amazing run-up that we’ve seen in the past couple of weeks didn’t just start overnight. The chart above shows how I’ve personally been rewarded: I added shares of both of these companies to my IRA in both February and March, and Mister Market has given me returns that I would have been happy to see over the next four or five years.
There’s very little doubt in my mind that both companies are probably overpriced today, and I think the market is seeing the same thing: Both were down at market close on May 14, to the tune of 5% for Tesla Motors Inc (NASDAQ:TSLA), and nearly 13% for Solar City. But even with today’s loss, the market is still valuing these two “Energy Future” players pretty high: To the tune of $2.4 billion for SolarCity Corp (NASDAQ:SCTY), and closer to $9.6 billion for Tesla.
And considering that Tesla Motors Inc (NASDAQ:TSLA) generated just over $560 million dollars in revenue for the quarter (after having only generated around $30 million a year ago) in essentially its first three months selling it’s first fully ground-up product, this is a pretty optimistic outlook by Mister Market. He’s even more pie-in-the-sky on SolarCity Corp (NASDAQ:SCTY): It just reached the $30 million dollar revenue mark this quarter.
From a valuation perspective, that means Tesla Motors Inc (NASDAQ:TSLA) is carrying a Price-to-Sales ratio, or P/S, of 5.44, while SolarCity Corp (NASDAQ:SCTY)’s P/S ratio is a stratospheric 14. Here’s some context: Tech retail darling Amazon.com, Inc. (NASDAQ:AMZN) is widely panned as being overvalued to the extreme. Amazon’s P/S ratio? Around 1.6. Oh, and in case you don’t know, the lower the P/S number, the more cheaply valued a company’s stock is.
So … Is it time or not?
Not for me, and for a couple of reasons. First, I didn’t buy either of these companies with the end-game being today’s share price. Don’t get me wrong. It’s very tempting to sell, especially considering that I hold almost all of my shares of both in a tax-advantaged account, which would eliminate any capital gains (this year, at least). I’m invested in both of these companies for what they are trying to become, and while the share price has gotten ahead of the businesses, the businesses are performing well.
Besides, and this is the second reason: I’ve had terrible luck trying to “time” the market. I just don’t have any faith in myself in that regard- or maybe a better way to put it- I have zero faith in anyone being able to predict what will happen in the short term with the stock price of either of these companies. But with that said, I’m not adding right now. Lastly, would I open a position in either of these companies today if I wasn’t already heavily invested?
Yes I would. Here’s why:
Rich valuations, but a richer future
As expensive as both companies are today, the future is as bright as the midday sun for both companies. SolarCity Corp (NASDAQ:SCTY) actually has an all-important trait that Warren Buffett insists on for every investment that he’s ever made: Predictable revenue and profit streams. Every new contract brings in incremental revenues for a period measured in decades, not just years. Musk has often described it as a “massive, decentralized utility,” and as we all know, utilities are pretty good at generating incredibly predictable revenue and income streams.
Tesla Motors Inc (NASDAQ:TSLA), on the other hand, has found a different secret sauce, a la Apple Inc. (NASDAQ:AAPL). If you build something amazing, people will buy it, even if it’s more expensive than “comparable” products.The simple fact is that nearly every reviewer of the Model S has lauded the car with praise, and most have gone out of their way to stress that it’s an amazing car- it just so happens to be electric.
Take General Motors Company (NYSE:GM)’ Chevy Volt, on the other hand. At less than half the cost of the Model S, the “green” demographic should be snapping up a car that can drive the average commute without using any gas, right? Especially with range-anxiety keeping competitors like Nissan’s Leaf from taking a large bite out of the market. Tesla Motors Inc (NASDAQ:TSLA), on the other hand, is selling nearly as many units (maybe more, based on recent numbers) as either of these “affordable” options, and at twice or even three times the money.
Make an amazing car, and people will buy it. Make an electric car, and nobody will buy it? So far, that appears to be the case, since the Model S is outselling it’s real competition from Audi, BMW, and Mercedes.
And as far as the valuation, let’s look back at Amazon.com, Inc. (NASDAQ:AMZN): Experience tells me that companies that are “overvalued” by the market, tend to be the best performers, and as long as they perform, they maintain those high valuations. Amazon.com, Inc. (NASDAQ:AMZN) has carried a P/S ratio that historically has been close to where it is today, or even higher for sustained periods. And while Amazon.com, Inc. (NASDAQ:AMZN) isn’t a comparable to either of these businesses, there is a very valuable parallel- disruption of a major industry.While Amazon.com, Inc. (NASDAQ:AMZN) is altering the retail experience, Tesla Motors Inc (NASDAQ:TSLA) and SolarCity Corp (NASDAQ:SCTY) are positioned to change the way we think about and buy cars and energy both.
Foolish Bottom line
The “Elon Musk” effect has surely impacted share prices for both of these companies. The combined exuberance, and probably some unrealistic correlation of the two companies’ future prospects based on Musks’ past success, and incredible business savvy and intellect, has driven investor dollars en mass into both companies. Honestly, it has for me, because Musk could very well be a once-in-a-generation leader.
All that’s left is the execution.
Well, that and the hope for an (unlikely) IPO for SpacEx…
The article The New Bubble: Elon Musk? originally appeared on Fool.com and is written by Jason Hall.
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