Tesla Motors Inc (NASDAQ:TSLA) shares fell nearly 15% after a Goldman Sachs analyst valued it 30% below its recent highs. After running up from less than $40 a share at the start of the year to over $120 by mid-July, is there any question that the company’s shares are overpriced?
Elon Musk co-founded Tesla Motors Inc (NASDAQ:TSLA) to build electric powered automobiles. The Roadster, the company’s first car, was a splashy showcase model. It proved the concept and quickly became a plaything for the rich and famous. Part of that was the car’s high price tag, but the race car design and limited range were other reasons that the Roadster was a toy and not a utilitarian vehicle.
The latest model, dubbed S, is being built and sold now with a price tag near $100,000. There was a cheaper model available, but low demand for the lesser version led Tesla Motors Inc (NASDAQ:TSLA) to drop it. The Model S is clearly designed to be a useful passenger car, but it still has a relatively high price tag and somewhat limited range.
Sales were robust enough to push Tesla into the black in the first quarter. It was the first time the company has turned a profit and proved the catalyst for the amazing price advance. Only the shares have clearly moved too far, too fast.
What’s a car company worth?
Tesla Motors Inc (NASDAQ:TSLA)’s trailing 12-month earnings are still negative, so it’s impossible to figure out a trailing price to earnings ratio. And the company stopped reporting its backlog when it turned profitable, which makes it hard to project how it might do in the future. However, the company earned a whopping $0.10 a share in the first quarter.
If you assume it can earn an equal amount each quarter, its PE would be over 280 based on recent prices around $115 a share. If earnings doubled to $0.20 a quarter, the PE would still be around 140. Tripling earnings would lead to a PE of over 90. Earnings would need to be $1.50 a quarter, or six dollars a year, to bring the PE down to around 20.
Ford Motor Company (NYSE:F)‘s PE is around 11. Toyota Motor Corporation (ADR) (NYSE:TM)‘s PE is about 21. There are two questions to ask. First, is there any chance that Tesla’s earnings are about to jump from $0.10 a quarter to $1.50? Second, is Tesla worth such a massive premium to larger, better positioned industry participants if earning don’t explode?
The company sells cool cars with impressive technology, but it is far from an earnings explosion, particularly if it can’t find buyers for cheap versions of its car. Then there’s the issue of a support infrastructure—there is none. If a Tesla Motors Inc (NASDAQ:TSLA) owner runs out of juice, the car turns into a paper weight.
In fact, Tesla Motors Inc (NASDAQ:TSLA) is planning to build out an electric “gas station” network so owners can drive coast to coast. That’s not going to be cheap, but no one else is lining up to build it so the company has no choice but to go it alone. It’s hard to believe it can turn a profit and build this network.
Buy American, or Japanese
Investors looking for an auto stock would be better off buying Ford Motor Company (NYSE:F) or Toyota Motor Corporation (ADR) (NYSE:TM). Ford was the only major domestic automobile company to avoid a government handout during the recession. And it didn’t have to resort to bankruptcy, either. Although long-term debt accounts for over 80% of its capital structure compared to less than 25% at GM, the company is strong enough to have started increasing its dividend again.