Investors in Tesla Motors Motors (TSLA) hit the brakes pretty hard this year, but TSLA stock is still up 500% since the end of 2012 and that makes shares far too pricey to buy now.
There’s no doubt that TSLA represents something truly revolutionary and exciting. Tesla Motors has reanimated the market for electric vehicles at pretty much the perfect time, with sustainable energy and climate change coming to the forefront of the public’s mind.
More importantly, Tesla Motors makes just about the perfect car. Consumer Reports said the Tesla Motors Model S is the best-performing car ever tested by the organization. It’s sleek, futuristic, safer than a conventional car and a dream to drive. What’s not to like?
Furthermore, the market for electric vehicles could truly be transformative. Tesla Motors could be to the automotive industry what Apple’s (AAPL) iPod was to the music and consumer electronics industries. (Or what the iPad was to the PC.)
Tesla Motors has a first-mover advantage that should keep it in the poll position of this new industry for years to come. With this kind of innovation, the competition usually takes years to catch up to a groundbreaking consumer product like the Tesla Motors electric car.
TSLA stock also has the advantage of reflecting the company’s Gigafactory, which will be the world’s larger maker of batteries. This $5 billion project wouldn’t just make Tesla Motors cars more affordable for a mass market, though (the Model S starts at $78,000). Making batteries on this scale could reverberate through any number of manufacturing industries, and even the electricity market.
The plant is the key to Tesla Motors ramping up to produce 500,000 electric cars a year vs. just 35,000 now — and, of course, it has its own risks.
But that’s not what makes TSLA stock a no-go area at $200 per share. It simply comes down to the valuation.
TSLA Stock: What’s the Price of Exuberance?
As often happens with really exciting opportunities, TSLA stock is getting a “wow” premium. But there’s no way to account for exuberance. Left to conventional measures, in no way, shape or form does TSLA stock look reasonably priced over the shorter term.
TSLA stock has a forward price-to-earnings multiple of 65. That’s four times more expensive than the S&P 500. Even with a long-term compound growth forecast of 40%, TSLA stock is still stretching the valuation.
That has TSLA stock rising more than five times faster than the broader market relative to its growth forecast. As far as the top line goes, TSLA stock has a price-to-sales ratio (P/S) of more than 12. For the sake of comparison, AAPL stock has a P/S ratio of about 3. Even analysts’ average price target implies just 10% upside in the next 12 months or so.
Also worrisome is that TSLA stock is a momentum stock and momentum stocks are getting shellacked this year. Investors don’t want to hold these names now that the bull market is getting old. There’s a reason why utilities are having a smoking-hot year — they’re late-cycle stocks.
A lot of things have to go right to justify TSLA stock at $200. And even if everything surprises to the upside, TSLA stock won’t be a winner in a bear market.
Tesla Motors is as exciting as companies come, but there’s a difference between a company and its stock. Don’t buy TSLA stock at these high levels or you might be forced to sell lower (and sooner) than you think.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.