Tesla Stock – Sky-High Potential, But Priced for Perfection

Tesla Motors (TSLA) stock keeps notching new highs, but as exciting as that may be for anyone holding TSLA, it’s also further stretching a sky-high valuation.

tesla stock earnings tsla stockTesla stock is getting a boost from a couple of pieces of good news. For one, analysts at Stifel upgraded TSLA to a “buy” Tuesday, with a price target of $400. And last week, Tesla announced a partnership with China’s No. 2 wireless carrierChina Unicom (CHU) — to build a hundreds of charging outlets across the country.

Tesla stock was up 5% in midday Tuesday trading largely in response to the former bit of news.

As we’ve written before, there’s little doubt that Tesla stock 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.

Furthermore, the market for electric vehicles truly could be transformative. Tesla 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.)

TSLA stock also represents a bet on Tesla’s “gigafactory” project, which will be the world’s larger maker of batteries. The project will make Tesla cars more affordable for a mass market. It could also have a huge and profitable impact on any number of manufacturing industries, and even the electricity market.

The gigafactory is the key to Tesla ramping up to produce 500,000 electric cars a year (or at least producing enough batteries for that many EVs) vs. just 35,000 now.

Tesla Stock: Speculative and Pricey

When Stifel hiked its price target on Tesla stock to $400 over the next 12 months or so (good for 40% upside from here), it assumed a forward multiple of 50 times Stifel’s 2017 earnings per share estimate for Tesla stock. That’s expensive, but it’s much cheaper than what Tesla stock goes for these days. Indeed, the forward price-to-earnings ratio on Tesla stock is currently 84.

That’s a huge red flag for patient value investors. True, if Tesla becomes the world-changing company the market is betting on, it’s a buy. But that’s a huge “if.” It also could take a decade or more — and many ups and downs — to play out.

It’s a high-risk, high-reward bet, and a fairly speculative one at that. After all, Tesla seeks to revolutionize the auto industry, which is not only enormous, but entrenched. It’s also not as if the car manufacturers are going to sit idly by while Tesla tries to take market share. They have ample resources of their own to build affordable electric vehicles.

That valuation leaves Tesla vulnerable to a big selloff should the news flow or market turn against it. The current forward P/E makes TSLA more than five times more expensive than the broader market. Even with a long-term compound growth forecast of 40%, Tesla stock still is pushing it.

Tesla very much has to grow into its valuation. That’s going to take time — and there will be both bear markets and recessions along the way.

If you want to take the risk with TSLA stock, be prepared to hold it through some steep losses before it bounces back, because there almost certainly will be some.

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


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/tesla-stock-tsla/.

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