Buying Shares of Tesla (NASDAQ: TSLA)

Is the Stock Overvalued?

By Justin Williams
Monday, October 28th, 2013

Tesla Motors Inc. (NASDAQ: TSLA) stocks opened up today at $170.31. To date, its shares have soared more than 600 percent since it went public more than three years ago. But does that mean it is overpriced or just doing good business?

teslaIf we were to ask CEO Elon Musk, he would declare the former. Just last Thursday, at the opening of Tesla's first retail store in London, he was quoted saying, “The stock price that we have is more than we have any right to deserve.” And maybe he’s right.

Not only is Musk personally calling out Tesla shares, but the stock has been trading at 100 times its 2014 earnings estimates. Tesla is far and away the best performing U.S. auto stock this year, and all the signs point to overpriced.

But even shots from its own CEO can’t stop Tesla from rolling on. It received more good news when U.S. officials chose not to probe a battery fire that took place involving one of its Model S vehicles. At the same time last week, the state of California delayed changes to its green-car credits program from which Tesla benefits.

An inquiry into the Model S vehicle fire that occurred October 1 right outside Seattle, Washington could have been a devastating blow. It did trigger shares to drop 10 percent over two days, but officials deemed the incident a coincidence and one that would have resulted in fire even with a combustible engine vehicle.

It’s a happy coincidence that the U.S. government shutdown just so happened to be during that time. Regulators have formally investigated two other battery-powered vehicle fires in the past – General Motors Co.’s (NYSE: GM) Chevrolet Volt and Fisker Automotive Inc.’s Karma – both resulting in recalls.

And in California, the Air Resources Board delayed changes to its strict zero-emission vehicle (ZEV) program, a green-car credits program that currently earns Tesla its maximum ZEV credits at level 7. The proposed changes would have made 4 ZEV credits the maximum Tesla could earn from a sale of one of its electric cars.

That means the reported $119 million in sales of such credits through the first half of this year, or 12 percent of its revenue, would be dramatically altered, according to Bloomberg.

These credits have helped the carmaker post its very first quarterly profit and made it possible for it to repay a U.S. loan nine years before its due date. Its rapid success has even pushed the company to expand into Europe and Asian markets.

Musk made a similar comment on the company's stock price back in August during a CNBC interview, but investors didn’t pay it much mind. Tesla stocks have only climbed 10 percent since then.

His latest comment comes just days after Netflix (NASDAQ: NFLX) CEO Reed Hasting cautioned about his company’s stock in a letter to shareholders. Netflix was very similar to Tesla in 2003 when it too rallied some 400 percent, only to see shares plummet in 2004. Things have been shaky ever since, but shares have recently bounced back strongly, leading to Hasting’s gentle reminder.

Today, Netflix is up 260 percent, according to CNNMoney, and trading at 85 times 2014 earnings estimates.

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Down to Earth

Now, you might say that when any CEO talks down his stock – especially one like Elon Musk, who owns more Tesla shares than anybody else – there’s got to be a catch (or maybe he’s got a case of the modesties). We don’t see this often.

Microsoft (NASDAQ: MSFT) did the same thing in September of 1999 when then-president Steve Ballmer warned about the overvaluation of technology stocks at the time. He included Microsoft in that category, and sure enough, the dot-com bubble had burst by 2000. Microsoft, along with a slew of others, saw their stocks go straight down.

So it’s not like we haven’t been warned before, and look what happened then. We should definitely take heed as investors.

It’s also important to look at big investors and what they’re doing with momentum stocks like Tesla. Billionaire Carl Icahn just dumped more than half of his stake in Netflix and collected a nice profit.

You know that the market is simply an irrational beast sometimes, and who knows how high Tesla can go? It’s been giving us all a big surprise for some time now, and it never seems to falter.

And even as Elon Musk said what he did, he’s still more confident in his vehicles than ever before as the company continues to grow.

According to Business Insider, he claims that while the price is high now, Tesla will grow into its valuation. Musk said:

"We're going to do our best to fulfill the expectations of investors and I think in the long-term that stock price is going to seem fair. It's difficult to predict where it goes in the short or medium-term but I do feel good having the company achieve that value and more in the long term."

Sounds like the words of a CEO to me. Of course things will be sitting pretty in the long-term from his eyes.

As investors, if you’re not in now, I would keep it that way and see how things play out. And if you are, it’s time to exercise extreme caution – but sit tight. Don’t go speeding off just yet.

 

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