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Tesla Motors Inc (TSLA): Why I’m Short-Selling The Stock

Tesla Motors Inc (NASDAQ:TSLA) is a different kind of company. It doesn’t advertise. Its workers are non-union, and it seemingly does everything counter to the traditional automobile industry – no dealerships, no real network for repairs…yet.

Investors rightfully love the story. Tesla Motors Inc (NASDAQ:TSLA) is the “tech story” in a very capital-intensive automobile industry. The company’s high-priced cars are selling like hot cakes, with the firm reporting production of more than 5,000 units in the first quarter, and recognized revenue for 4,900 vehicles. The company’s previous guidance was set for 4,500 cars.

Valuing Tesla

Unfortunately for automakers, ramping up production isn’t as easy as snapping fingers. Automakers require significant investments in production to meet new demand. Tesla Motors Inc (NASDAQ:TSLA), again, is different here. At the time of writing, Tesla is operating for only a single shift. Additional shifts will allow for new automobile production without capital outlays.

That’s good for Tesla – it means the company can grow without burning through its cash.

However, this rosy picture is already more than priced in. As Tesla grows, its profits per car shrink considerably.

Notice that in just one quarter, from the fourth quarter of 2012 to first quarter 2013, its gross margin rose by 900 basis points to 17% from 8%. Of that margin, substantially all of it is from the sale of regulatory credits to other automakers. The company realized 12% of revenue from the sale of ZEV credits. ZEV credits are not part of the business model internationally, meaning sales in Asia and Europe will come with much lower forward margins.

Tesla Motors Inc (NASDAQ:TSLA)So why is Tesla Motors Inc (NASDAQ:TSLA) so keen on going overseas? One would have to wonder if growth in the United States isn’t going to happen as fast as some believe. Sales in the United States are remarkably more profitable for the company, thanks to regulatory codes that, in effect, subsidize the production of Tesla’s electric cars.

Consider also that dilution remains a serious threat to the equity holder, with Tesla Motors Inc (NASDAQ:TSLA)’s share count rising by 18% in just the past year. While it may be a better company today, one share of stock certainly isn’t worth what it used to be.

Better opportunities in autos

Other American automakers present a better value for investors. While electric cars are seen as the “way of the future,” gasoline cars are still selling at an unbelievably brisk pace in the United States at a rate of more than 14 million cars annually.

American automakers are poised to benefit from this trend. Ford Motor Company (NYSE:F), which trades for less than 8 times forward earnings, has a rock star portfolio of small cars in its Fiesta, Fusion, and Focus lines, which utilize common platforms to create high-quality, inexpensive, and eco-friendly small cars for the American public. Last year, Ford Motor Company (NYSE:F)’s Focus became the best-selling car in the world.

Likewise, General Motors Company (NYSE:GM) offers impressive value against high-flying Tesla Motors Inc (NASDAQ:TSLA) shares. The company recently updated its truck lines, which are flying off the lots as construction firms invest in their fleets ahead of a multi-year run in American housing. Full-size pickups sold at a 27% higher rate in April than the year ago period.

The electric car is cool. It’s interesting, and it’s different. But when it comes to making money, Ford and General Motors, which trade at single digit earnings multiples, are a far more convincing value than Tesla, which trades at more than 200 times earnings when one annualizes first quarter earnings of $.12 per share.

I’m making a CAPS trade, going long Ford and General Motors Company (NYSE:GM), and selling short Tesla Motors Inc (NASDAQ:TSLA).

The article Why Not to Fall for This Story Stock originally appeared on and is written by Jordan Wathen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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