Time to Tap the Breaks on Tesla Motors Inc (TSLA)?

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Tesla Motors Inc (NASDAQ:TSLA) is off to a tremendous start in 2013. The company reported its first profit in its history last quarter and did so in dramatic fashion, destroying analyst estimates in terms of both vehicles sold and earnings per share. Additionally, a string of positive news ranging from the early repayment of a U.S. government loan to the crowning of the Tesla Model S as Motor Trend’s 2013 Car of the Year has generated significant excitement around the company and the stock.

Tesla Motors Inc (NASDAQ:TSLA)

Add in a visionary CEO with ambitious plans to roll out a network of superchargers that will make fast charging a reality as well as allow for coast-to-coast travels in a Model S, and this stock chart for Tesla Motors Inc (NASDAQ:TSLA) so far in 2013 begins to make a little bit of sense:


TSLA data by YCharts

While the company’s stock has settled a bit from the high of $114 reached in May, Tesla Motors Inc (NASDAQ:TSLA)’s current market capitalization of over $11 billion presents an interesting quandary for current and prospective investors in the company. Does the company have the growth potential to warrant a premium valuation above its peers such as the one awarded to Amazon.com, Inc. (NASDAQ:AMZN), or should Tesla Motors Inc (NASDAQ:TSLA) be thought of using the same metrics as other car companies such as Ford Motor Company (NYSE:F or General Motors Company (NYSE:GM) ?

Growth certainly deserves a premium

A quick look at Tesla Motors Inc (NASDAQ:TSLA)’s past, present, and future shows tremendous growth. During the first quarter, Tesla reported delivery of almost 5,000 vehicles. While this total blew past analyst expectations, CEO Elon Musk recently laid out a plan for the company to reach an annualized run rate of 25,000 vehicles by the end of the year and a long term projection of 500,000 vehicles per year.

That’s some serious growth, and it comes from a number of drivers that the company hopes to exploit simultaneously. First, the company has a very small geographic footprint at the moment, which is expected to expand dramatically both within the United States and internationally. Second, the company has announced its plans to enter the SUV market in 2014 with the Model X and has already hinted at future releases of vehicles at lower price points. Third, the company simply does business differently than other automakers; Tesla owns its own sales channels and provides access to superchargers at no charge to existing Tesla owners. This very different approach has resonated with customers and is expected to continue to result in market share gains.

In combination, management expects new vehicles and new markets to help propel the company to 500,000 vehicles a year. Analysts expect that the company will deliver uncommon revenue growth for a car company, with revenue expected to grow by 358% and 27% in 2013 and 2014, respectively.

A dose of reality

Tesla’s growth trajectory is certainly worth a premium, but the big question is: how much? Here’s a look comparing Tesla’s fundamentals to its competitors:

TSLA F GM TM HMC
CAPS rating (out of five stars) 1 star 4 stars 2 stars 3 stars 5 stars
Share price $97.76 $15.68 $33.89 $117.55 $37.57
Market capitalization $11.3 $61.6 $46.6 $186.2 $67.6
TTM revenue (in billions) $0.9 $137.6 $151.4 $280.4 $125.5
TTM price to sales ratio 12.83 0.45 0.31 0.68 0.56
2013 estimated revenue growth 358% 7.5% 2.1% -17.3% -2.9%
2014 estimated revenue growth 27.0% 5.2% 6.6% 6.1% 18.6%
TTM price to earnings ratio N/A 10.63 11.62 15.23 14.51
Forward price to earnings ratio 94.00 9.39 7.72 11.39 12.96
Five year expected earnings growth 32.9% 11.9% 15.5% 44.9% 28.8%
Dividend yield 0.0% 2.6% 0.0% 1.2% 2.2%
Source: Motley Fool CAPS and Yahoo! Finance – 6/2/13

Price to sales is probably the most comparable measure among the automakers in the table above. While the peer group of major car companies has price to sales ratios in the range of 0.50, Tesla’s P/S ratio of 12.83 certainly stands out. None of the other companies have the same growth opportunity as Tesla or as revolutionary a product, but trading at a premium of 25 times the peer group is certain worth taking a moment to consider.

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