InvestorPlace’s James Brumley hit the nail on the head Aug. 1 when he declared the future of Tesla Inc (NASDAQ:TSLA) and TSLA stock depends almost entirely on the Model 3.
“Between the advent of the Model 3 and a key earnings report, the next few days are going to be telling as to how the market really feels about the company’s future,” wrote Brumley. “The weak start to the new trading week for TSLA stock — just a couple days removed from the big event — isn’t an auspicious beginning.”
Tesla: The Big Short
A number of David Einhorn’s short positions haven’t done well in 2017. Tesla stock is up 49% year-to-date, a result the hedge fund manager clearly is having a hard time understanding.
“The company is expected to burn over $2 billion this year as it begins production of its Model 3,” Einhorn said Tuesday on a conference call. “It’s currently only capitalized for the next three quarters. As Tesla attempts to achieve scale for the Model 3, it will depend on the capital markets’ willingness to fund it.”
Einhorn’s a value buyer these days; a term investors wouldn’t use to describe Tesla’s stock.
How Overvalued Is TSLA Stock?
It currently trades at 5.7 times sales or about half its five-year average. Relative to itself it’s not that expensive. However, compared to the S&P 500, it definitely isn’t cheap.
While I can’t pretend to know Einhorn’s thinking behind Tesla’s valuation, he obviously feels that the company could find itself in a bit of jackpot later this year when it has to come up with the capital to get the Model 3 to 20,000 vehicles delivered per month, something Elon Musk expects by December.
If the Model 3 goes from 100 Model 3 deliveries in August, then 1,500 in September, it’s going to require a ton of money to boost production by 1,200% in the span of three months.
Analysts estimate Tesla’s annual earnings-per-share for the next three years to be -$6.06 in 2017, -$0.85 in 2018 and $4.91 in 2019. If it comes anywhere close to the analyst’s 2017 revenue estimate of $11.4 billion, 62% higher than in 2016, I believe the $6.06 loss is rather low given the capital expenditures required to make this growth happen.
Einhorn might be wrong about Tesla, but it’s not hard to understand why he thinks its stock is overvalued. Elon Musk is the ultimate promoter who could probably get some people to buy a Model 3 even if it didn’t come with an engine.
Those who own a Tesla and TSLA stock don’t care about valuation. They’re all-in devotees. However, the rest of us who believe earnings growth drives share prices, are far more willing to listen to listen to what Einhorn and other shorts have to say.
Bottom Line on TSLA Stock
In June, I explained why Tesla stock could hit $1,000. About one-third of the way there, the Model 3’s success or failure is what stands in the way of getting to a four-digit share price.
As smart people go, Elon Mark is right up there. He’s brilliant at seeing the future and pushing ahead despite the countless obstacles that stand in his way.
At a top price of close to $60,000, the Model 3 isn’t your garden variety compact sedan. Logically, owning one of these cars, especially if you have a large family, makes almost no sense.
So, if I’m an investor living in Des Moines with a wife, two kids, and a dog, I’m probably not going to buy Tesla stock because my number one rule of investing is to own stocks that make money, regardless of any valuation metric.
However, if I’m Sandy in Palo Alto, my kids aren’t living at home and I need a second car to drive, owning the car and the stock make a lot more sense.
Is TSLA stock overvalued?
It is if the Model 3 doesn’t hit 20,000 per month by the end of the year. It isn’t if it does. It’s that simple.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
