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The Root Of The Tesla Motors Inc (TSLA) Hype

Tesla is all about word-of-mouth. That is how the company has become an overnight phenomenon without doing nearly the amount of print and TV advertising that competitors like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) spend. Now, we will be among the first to admit that the world-of-mouth advertising didn’t go viral overnight; it was a building process, but Musk has worked wonders through social media outlets including the aforementioned Twitter, where he has more than 225,000 followers. Only the handful of stores and social media have been the catalyst for the growing popularity of the company and the stock.

According to Tesla’s spokeswoman Alexis Georgeson, the company has no immediate plans for paid advertising, because it hasn’t needed it to this point. “Right now, the stores are our advertising. We’re very confident we can sell 20,000-plus cars a year—without paid advertising. It may be something we’ll do years down the road. But it’s certainly not something we feel is crucial for sales right now,” she said.

How is this buzz controlled so well?

Jeremy Anwyl of Edmunds.com said that it’s Musk’s use of social media and the way he plays the Tesla story to the auto and general media that has generated much of the free advertising and PR.

“They’re selling very few cars when you think about it — but they are getting an awful lot of buzz,” she said, adding that Musk is “very Steve Jobs-like in how he deals with the media. A lot of the attention is not generated through what we consider traditional advertising. It’s really through social media.”

Key peers

Auto giants GM and Ford Motor Company (NYSE:F) spent over $5 billion in advertising dollars in 2011 alone, with most expecting that number to rise by the end of this year. General Motors Company (NYSE:GM) accounts for approximately three-fifths of this amount, and its decision to cut the $10 million it allocated to Facebook ads last year makes Tesla’s zero-bound strategy look even more startling. A closer peer, Nissan’s Leaf, was allocated more than $20 million on ads last year (via Kantar).

Additionally, much has been made about Tesla’s apparent overvaluation in comparison to Ford, GM and Toyota. For example, one analyst estimates Tesla trades at 17 times the value of these peers in terms of market cap per expected car sold. From a more traditional standpoint, Tesla sports a forward P/E of 94.4, far, far above the likes of Ford (9.3) and GM (7.9), for example, but we’d never short on valuation, and you shouldn’t either.

Innovation trumps valuation

Still, like Amazon, Tesla’s innovation requires investors to think about this company in an innovative manner. If the company can meet or beat Wall Street’s current-quarter revenue and earnings figures—analysts predict $393 million on the top line and EPS of $-0.14—there’s more appreciative potential here.

Robert W. Baird recently upped their price target on Tesla to $118, an upside of more than 20% of current levels. Critics may claim that shares are overvalued by traditional metrics, or that Elon Musk’s charm is all hype, but until something drastic changes in the company’s marketing strategy, expect more of the same buzz.

Disclosure: None

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