The most controversial stock on Wall Street reported first-quarter earnings on Wednesday, and boy was it a doozy. Tesla (NASDAQ: TSLA) stock initially rallied more than 10% following the report.
I’ve long been a Tesla skeptic. But I’d be the first to admit this quarter was the most impressive I’ve ever seen from the company. Tesla’s business clearly seems to be on the right track.
For the first time ever, Tesla has demonstrated a business model that can be viable in the long-term. Of course, Tesla’s business is completely different from TSLA stock as an investment. As impressed as I was with Tesla’s quarter, it’s still an unwise gamble to buy the stock at its current valuation.
When it comes to Tesla, many bull and bear arguments are so out there that I have to remind myself to focus on the actual numbers. Tesla reported adjusted EPS of $1.24, handily beating consensus analyst estimates of a 36-cent loss. Revenue of $5.99 billion also topped analyst estimates of $5.9 billion.
In the same quarter a year ago, Tesla reported a $2.90 per-share loss and $4.54 billion in revenue. Revenue was up 32% from a year ago. Previously reported vehicle deliveries for the quarter were 88,400, up 40.3% from a year ago.
Auto gross margins in the quarter were 25.5%, up 3% from last quarter and up 5.3% from a year ago.
Of course, the numbers weren’t perfect. Tesla reported negative free cash flow of $895 million in the quarter, suggesting it is back to spending much more money than it is bringing in.
In a nutshell, Tesla reported impressive revenue growth and even more impressive automotive margins. As a result, it reported its third consecutive profitable quarter for the first time in the Model 3 era. In my opinion, this is as close to a home run as Tesla is going to hit at this stage of its business.
TSLA Stock Valuation
Now comes the hard part for TSLA stock bulls. At around $876 per share, Tesla’s market cap is about $190 billion. As I recently pointed out, Tesla’s market cap is now significantly more than the combined market caps of Honda (NYSE: HMC), General Motors (NYSE: GM), Ford (NYSE: F), Nissan (OTC: NSANY), Fiat Chrysler (NYSE: FCAU) and Harley Davidson (NYSE: HOG).
For some perspective, Tesla originally said it would hit 500,000 vehicle deliveries in 2020. That total now seems very unlikely due to the COVID-19 breakout. Regardless, GM reported 7.71 million vehicle sales in 2019. In other words, if Tesla somehow pulls off a miracle and reaches 500,000, it will be doing about 6.5% of the business GM is doing.
Yet somehow Tesla is valued at more than four times the market cap of GM.
I recently compared Tesla’s valuation to both its auto peers and high-growth big tech peers like Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). At 73 times forward earnings and 6.2 times sales, Tesla stock is overvalued no matter which group you compare it to.
How to Play TSLA Stock
Unfortunately, no matter how impressive Tesla’s quarter was, the stock’s crazy valuation makes buying it much closer to a casino bet than an investment. Tesla shut down production at its Fremont factory on March 23 due to the coronavirus outbreak. Yet somehow the stock has more than doubled in roughly a month since that shutdown. In the middle of a recession.
Whether you love or hate the company, the stock is looking more and more like the latest Wall Street mania. I’ve previously compared it to the bitcoin bubble back in December 2017. Sure, bitcoin bulls can say the cryptocurrency’s price is still up 479% overall in the past three years, which is true. But it never had any business near $20,000 back in 2017, and it hasn’t come anywhere close to that level since.
TSLA stock has gotten inflated far beyond a reasonable level. The company appears to be on the right track for long-term growth. But the stock is just as likely to drop 60% from current levels as it is to rise 60% in the next couple of years. Its valuation is derived from a story, not a business. If that story changes at all or if investors find another story they like more, there’s no telling where the stock will trade. There’s no need to gamble. I’m not going long or short TSLA stock any time soon.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GOOGL and GM.