With revenue of only $2 billion projected for 2013, Tesla is a baby compared to GM and Ford. Despite this, it is trading on a much higher forward earnings multiple compared to its larger peers, a higher price-to-sales multiple and more importantly is currently trading with a 52-times price-to-book value.
These multiples appear seriously overstretched when compared to Ford, which is trading on a forward P/E multiple of 6.4 after the deduction of cash ($3.5 per share) and GM, which is trading on a forward earnings multiple of 2.6 after the deduction of cash ($19.8 per share.) The comparison is especially apt against GM, which has a price-to-book value of only 1.1.
Tesla may be an exciting new electronic car company but right now the stock is too expensive. It’s not the fact that Tesla is not in demand, because the company’s products actually are. It would appear that Tesla is only limited by its own production instead of demand. With the company on a forward P/E of 71, however, there is almost no room for failure and any fall below expectations could result in a swift downside correction. Assuming the company achieves a gross margin of 25% and a net margin of 5% for this year (and assuming that these margin figures remain constant), the company would have to increase its earnings by 600% before its current stock price was justified and in line with the company’s sector peers.
There is no doubt that Tesla is a good company. The market is putting to high a premium on it right now, though, and the is little room it has for failure makes it a risk in the long term.
The article Be Careful Around Tesla Motors originally appeared on Fool.com and is written by Rupert Hargreaves.
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