Among growth stocks, Tesla Inc (NASDAQ:TSLA) remains one of a select few upper-echelon companies that continues to soar amid out-sized growth expectations. Plus, the market continues to factor in anticipation that TSLA’s current position in the autonomous vehicle market — which is only in its infancy stage — will stand the test of time.
The idea that TSLA will not only revolutionize the automobile industry, but improve the standard of living for folks all around the world with environmentally friendly, economical transportation and energy storage has driven TSLA stock to ever-increasing highs.
Early last week, TSLA stock closed at an all-time high just shy of $387 per share, but has since pulled back roughly 3% to give the young EV company a market capitalization of $47.8 billion.
Investors who have chosen to ride the TSLA wave into the sunset have been well-rewarded. Those who bought into the growth story and strategic outlay of the company’s eccentric and inspiring CEO Elon Musk five years ago have seen their investments grow more than 1,500%. That’s right — a $10,000 investment in TSLA stock five years ago would now be worth approximately $163,000. Not a bad return for the believers out there.
If any investor uncertainty is hampering TSLA stock, it doesn’t show. Those who have chosen TSLA as a portfolio holding seem to have piled in for the long term, and those who bought shares during one of the more recent equity offerings have held those stock certificates tightly, fearing what could be monumental missed profits, should one be so foolish as to part with TSLA shares.
What I am about to propose is not revolutionary, nor is it a thesis I hold alone. In fact, some of the best money managers in the world have indicated that TSLA’s valuation has become outrageous, with some suggesting that “mesmerized” shareholders are buying into a company based on a fairy-tale story with an ending that may not be so happy.
Tesla Stock Growth Rate Is Unsustainable
The rate of growth of TSLA’s stock price cannot continue.
I didn’t say I’m predicting TSLA stock will crash, nor did I suggest that now may be the time to sell and get away from what may be a bubble company. What I am saying, however, is that Tesla is a company with far too much growth priced into its stock.
It will take years for the growth that has been priced into Tesla stock to manifest itself in any sort of meaningful repatriation of value to shareholders.
The basic idea of an investment is that the pleasure one would get from consumption today is foregone for greater profits (and therefore greater utility) tomorrow. In the case of a growth story like TSLA, future profits may seem enormous, however it is important to remember the underlying thesis relies on profitability and the ability to return profits to shareholders.
I have written previously about the hesitation that I and others with a contrarian view on TSLA have with respect to the company’s ability to return profits to shareholders. With recent fundraising efforts diluting shareholders and encumbering future cash flows via debt interest payments, it appears less likely that an investor today will be able to receive enough value in a lifetime from the company’s future cash flows to pay back the initial capital invested at today’s stock price levels.
Bottom Line on TSLA Stock
What contrarian investors such as myself try to explain to those drinking the TSLA Kool-Aid is that attempting to quantify TSLA’s current valuation is an exercise in insanity. The reality of Tesla’s relative valuation to other companies, specifically the payback period for an investor to receive capital back from TSLA stock, is downright outrageous.
When a company trades at more than 1,000 times cash flow while the average for a company on the S&P 500 sits at 13 times cash flow, investors are indicating that they are currently expecting to receive a rate of growth more than 75x that of an average publicly traded company.
Indeed, TSLA is an amazing company with an amazing vision. It’s just impossible for any company to sustain growth levels that would require industry out-performance on the order of 75-times its peers in perpetuity.
As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.
