A surprise earnings beat was a shot in the arm last month for Tesla (NASDAQ:TSLA); Tesla stock reclaimed highs not seen since February.
With shares heavily shorted, a modicum of good news was just enough to send shares higher. Shares skyrocketed from $254.50 at the open Oct. 23 to $317.47 at the close Nov. 4. But is now the time to buy Tesla stock?
Compared to electric vehicle makers like Nio (NYSE:NIO), Tesla is a more solid bet. However, shares remain richly priced, even when considering above-average growth.
Can TSLA stock grow into its valuation? Or will shares eventually retreat to a more reasonable price level? It’s all up in the air. But using valuation metrics, Tesla is not a buy at today’s price.
A Closer Look at TSLA Stock Earnings
For the quarter ending September 2019, analysts projected a loss of $0.23 per share. Tesla threw a wrench into the short-seller’s thesis with quarterly earnings of $1.86/share. But when talking about Tesla, it’s easy to be skeptical about their earnings.
The analyst community had its fair share of skepticism. JPMorgan’s Ryan Brinkman is uncertain about the “quality of this beat“. The company was unclear whether nonrecurring items were responsible for the earnings surprise.
This earnings beat comes as the company sees its first year-over-year sales decline in seven years. Sales for the quarter were down 8% from the prior year’s quarter. Operating income was also down 37% YoY.
One factor in Tesla’s earnings is its aggressive accounting for warranty expenses; $50 million out of $176 million in quarterly earnings can be attributed to changes in how they accrue for this expense. This tidbit from the TSLA 10-Q was catnip for Tesla bears.
But Tesla has strong catalysts in the pipeline for 2020 and beyond. Next summer, the company will launch the Model Y Crossover. The company’s Shanghai “gigafactory” is complete, and will apply for a manufacturing license by year-end.
Tesla Stock Is Tough to Value
Should investors value TSLA like a growth stock, or like a traditional automaker? Bulls believe “this time it’s different,” that Tesla is taking the automobile into the 21st century. To them, Tesla is a tech company that happens to manufacture cars.
Not only that, they have a premium brand. Tesla can be for cars what Apple (NASDAQ:AAPL) is for electronics. Leveraging an elite brand, they can carve a high margin business out of what’s typically a low-margin product.
But for bears, Tesla is all hype. Compared to established auto names, the stock is overvalued. Capital-intensive, cyclical businesses like the auto industry trade at low valuations.
With the major auto names ramping up their EV offerings, why pay a high valuation for Tesla stock? Tesla trades for 59.6 times projected 2020 earnings, and their current enterprise value/EBITDA (EV/EBITDA) ratio is 31.2. Compare this to established automakers:
- Fiat Chrysler (NYSE:FCAU): Forward price-to-earnings (forward P/E) of 5.3, EV/EBITDA of 2.3
- Ford (NYSE:F): Forward P/E of 16.5, EV/EBITDA of 14.4
- General Motors (NYSE:GM): Forward P/E of 8.7, EV/EBITDA of 10.3
- Toyota (NYSE:TM): Forward P/E of 9, EV/EBITDA of 8.2
- Volkswagen AG (OTCMKTS:VLKAF): Trailing twelve-month P/E of 6.8, EV/EBITDA of 9.5
So who’s right, and who’s wrong? It all comes down to continued growth. If the company’s growth really starts to cool, investors may start valuing the company more like a typical auto stock.
Too Hot to Touch at the Current Price
Conflicting bull and bear cases make Tesla stock almost like a political debate. But unlike in politics (where it’s hard to stay neutral on a moving train), investors can “wait and see” with TSLA stock.
The company’s financial situation is likely stronger than the bears would suggest. But Tesla isn’t afraid of aggressive accounting, as seen from the warranty accruals. At the current valuation, TSLA stock is grossly overvalued compared to its peers.
TSLA may be able to sustain above-average growth, along with its premium valuation to peers. But Tesla’s performance today could be a sign of the times. With the longest US economic expansion in history, Tesla has benefited from a strong economic environment. All bets are off on how Tesla will fare in a recession.
Shorting TSLA stock is risky business, but going long could be a foolish move. With clearer opportunities out there, save yourself the headache and avoid going long (or short) Tesla stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.