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Tesla Motors Inc (TSLA) and Mister Market: What’s a Company Worth?

I sold half my shares in Tesla Motors Inc (NASDAQ:TSLA) a few weeks ago, after seeing the share price skyrocket over the past few months. While many could give me kudos for “taking my winnings,” others would rightfully chide me for selling out of such a great story so early.

Both would be right.

Tesla Motors Inc (NASDAQ:TSLA)

That’s part of why I kept half my position. Tesla Motors Inc (NASDAQ:TSLA) is a great story, and in a decade we may look back and see it as an amazing one: the first successful new American automaker in over a century. We could also look back on the ashes of another failed attempt to break the status quo. But honestly I didn’t sell half of my position out of fear of failure, or retain half out of unreasonable expectations. I’m simply trying to understand how — over time — the market will value the company.

Perspective on valuations

The easy view for one to take on Tesla Motors Inc (NASDAQ:TSLA) today, and selling (or not buying) is how incredibly expensive shares have become in relation to the business itself. At the beginning of the year, the company was valued at around $4 billion. At close of market on June 29, the company was worth $12.6 billion, a 3-fold increase in a matter of months. Here we are today, with an incredibly high valuation for a company that will only have reached $1 billion in TTM sales for the first time ever, this quarter.

In short, Mister Market seems to be pricing for perfection over the next few years, and I’m not convinced that Tesla Motors Inc (NASDAQ:TSLA) can deliver on that. But with that said, there are other examples of companies that have carried very high valuations for sustained periods of time.

Trying to catch the future

LinkedIn Corp (NYSE:LNKD) is another fast-growing, industry-changing company that’s using innovative technology to break the existing construct of a market. But where Tesla Motors Inc (NASDAQ:TSLA) is leveraging the market for luxury cars to drive the cost of electric cars for the masses down, LinkedIn Corp (NYSE:LNKD) is using the power of social media to make it easier for both employers and prospective employees to connect to one another. Add in that it’s a great place for professionals to connect with one another, and the network effect and first-mover status make for a tremendous investment opportunity.

And if you think Tesla Motors Inc (NASDAQ:TSLA)’s expensive, LinkedIn Corp (NYSE:LNKD) is valued at nearly $19 billion and has generated barely over $1.1 billion through the past 12 months. But the lesson is that tremendous growth, and a chance to own a part of an industry changing company is a rare, and expensive, opportunity.

Back to the future?, Inc. (NASDAQ:AMZN) could be a great object lesson for investors in both of these companies. One of the few great companies to come out of the dot com era as a success, it sported an enterprise value of close to $35 billion at the end of 1999. Within 2 years, its value had fallen to almost $4 billion, and shares were down 90%. Here’s the rub: While Mister Market was freaking out, the company nearly doubled its sales. Simply put the bursting of the tech bubble sent shares crashing, despite the actual, real growth in the core business. By the end of 2003, sales had nearly doubled again, and the company had returned to its “expensive” status, with an enterprise value of over $21 billion.

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