Is Elon Musk Right About Tesla Inc (TSLA) Stock?

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Tesla Inc (NASDAQ:TSLA) CEO Elon Musk finally said it straight up about a week ago: Tesla is overvalued. TSLA stock has soared through the roof, in fact, racking up gains of more than 50% year-to-date, powered in part by a 2% surge Friday before traders head out for the Memorial Day weekend.

Tesla, Inc. CEO Elon Musk

Trading at 4.4x sales compared to General Motors Company’s (NYSE:GM) 0.33 and Ford Motor Company’s (NYSE:F) 0.32, Tesla stock appears to be in nosebleed territory.

Musk was speaking to The Guardian on a phone interview where he shared his thoughts regarding Tesla’s market cap, which is in similar territory as that by giant incumbents GM and Ford. This is what he had to say:

“I do believe this market cap is higher than we have any right to deserve,” he told the British publication.

Musk was also taken to task regarding Tesla’s less-than-stellar safety record at its Fremont plant where it is alleged employees regularly pass out. His response to that:

“We’re a money-losing company. This is not some situation where, for example, we are just greedy capitalists who decided to skimp on safety in order to have more profits and dividends and that kind of thing. It’s just a question of how much money we lose. And how do we survive? How do we not die and have everyone lose their jobs?”

Wrong Timing for Tesla?

It’s fairly rare for CEOs to talk down their stocks, bearing in mind that one of their major goals is to boost shareholder value.

You might be forgiven for thinking that this was just another of Musk’s gaffes, but no, this was not the first time the CEO admitted that Tesla carried an absurd valuation. He did the same thing back in August 2013 after Tesla stock had rallied an impossible 400% in the space of one year. And guess what? That rally was triggered after the first round of Model 3 tidings hit news feeds, pretty similar to the current situation.

Tesla stock tanked nearly 35% in the space of two months following Musk’s comments.

And Musk is in good company, too. Netflix, Inc. (NASDAQ:NFLX) CEO Reed Hastings is on record saying similar things about Netflix stock in 2013. In Hasting’s case, though, he was speaking after NFLX had lost nearly 80% of its value. (Netflix actually put up a strong rally right after Hasting’s commentary.)

So maybe we can surmise that Elon Musk got his timing wrong again, and could learn a thing or two from Hastings.

Tesla investors though might get away with it this time around, thanks to the Model 3 fever. TSLA has since then fully recovered from the 3% loss it suffered following Musk’s public musings.

Is TSLA Stock a “Greater Fool’s” Holding?

But that’s not the only difference between the two CEOs. Another significant one is that Netflix has recently started turning a profit, at least on non-GAAP basis, while Tesla’s red ink has refused to dry up.

Maybe Tesla is a ”greater fool’s stock,” too. Wedbush Securities’ Michael Pachter recently jarred NFLX stock bulls when he christened the stock a ”greater fool’s stock.” What Pachter meant is that when you purchase Netflix, you are essentially betting on finding someone who will be even more enamored of its growth potential to take it off your hands.

So, is Tesla a greater fool’s stock? After all, TSLA stock is currently nowhere near to becoming profitable despite selling 3.5x as many vehicles in 2016 as it did in 2013.

But here’s the rub with the idea of Tesla being a fool’s stock:

Netflix’s content costs are rapidly increasing while Tesla production costs are rapidly falling. Consequently modelling breakeven point for Tesla is easier than it is for Netflix due to unpredictable content costs and the fact that the company is so dependent on a huge susbcriber base to absorb those costs. Battery and powertrain costs account for the lion’s share of production costs for EVs. Luckily, battery costs have been falling at an average of 14% every year. TSLA boasts some of the lowest battery production costs in the business, and is likely to keep it that way thanks to scales of economies at its giant Nevada Gigafactory and others it plans to build.

Musk is on record saying that Tesla needs to sell a minimum of 500,000 vehicles every year to be profitable. Judging by current Model 3 trends, that might come around 2019.

Blue-Sky Thinking by Tesla Bulls

It might sound like a case of blue-sky thinking when billionaire investor Ron Baron predicted a $700 billion market cap for Tesla in about a decade (14 times current market cap), or more recently when Baird’s Ben Kallo set a $566 price target on Tesla stock if the company hits its production targets.

However, we have seen hot growth companies like Amazon.com, Inc. (NASDAQ:AMZN) gradually grow into their stratospheric valuations. There’s no reason why Tesla should not be able to follow suit.

As long as Tesla stays ahead of the pack in the rapidly expanding EV market, the valuation by TSLA stock might not look so absurd five years from now.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/is-elon-musk-right-about-tesla-inc-tsla-stock/.

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