Tesla (TSLA) rose after announcing a revenue disappointment and above-expectations EPS on a non-GAAP basis (on a GAAP basis, the company posted a wide loss). This mix of good and bad news typifies the company’s latest earnings release, yet the stock’s response was extremely positive.
Firstly, Tesla’s Model S sales were effectively at guidance with 7,785 sales, but far short of analysts’ expectations of 8,000-8,200. Future guidance was held steady, at a production of 35k cars for the full year.
Non-GAAP gross margins fell sequentially to 23%, but were up slightly from 22% a year ago. Non-GAAP gross margins are expected to rise to 28% in the fourth quarter, and Model X units will be delivered in the third quarter of 2015, a delay that Tesla said was necessary to accommodate higher Model S demand.
Tesla’s Current Valuation
Since Tesla loses money on a GAAP basis, it has no real P/E ratio. On a non-GAAP basis, the company’s TTM P/E ratio is 423. Only 9 U.S. listed stocks with a market cap over 5b have a higher P/E ratio (BBVA, TV, HBANP, INPGP, LYV, DATA, VIPS, VNO, ZIONP) and only one of those, the Banco Bilbao Vizcaya of Aregentina (BBVA), has a higher market cap than TSLA.
This demonstrates that TSLA is perhaps one of the most speculative and highly priced stocks on Earth. What is driving that price?
For one, Elon Musk’s charisma. Sell-side notes have frequently argued that Musk’s own intelligence and competence is reason to buy the stock, damn the metrics. About a year ago, Goldman Sachs released a note to clients arguing that Musk’s reputation, connections, and intelligence were reasons to have a strong conviction on the name.
Another issue is the battery factory, which is very much a wild card and difficult to model. The bull case hinges on this factory turning Tesla into a car manufacturer into a renewable energy infrastructure provider for other companies as well. Again, because this is a spin-off enterprise, it has little relationship to car sales and Tesla’s current revenue drivers.
In addition to these drivers, the stock’s price growth resulted from a single metric: a projected price/sales ratio. For the last four quarters, Tesla’s revenues rose to $3.2 billion. At a market cap of $30.5b, it’s trading at 9.5 times current sales.
That ratio will decline radically thanks to the company’s hypergrowth. If Tesla continues to grow at a CAGR of 50% for the next 5 years thanks to new catalysts such as the batteries, a cheaper mainstream car, and growing industrial capacity, the company’s revenues should rise to $24.3b in five years, meaning its price-to-sales ratio will be 1.2. If it grows at 40%, its P/S will be 1.8. If it grows at 60%, the P/S will be 0.9.
None of these ratios is really all that unreasonable, but they are still very high for the sector. If we look at Ford (F), we see that the company’s P/S ratio is about 0.36. GM has a P/S of 0.31. For TSLA to be priced at that P/S ratio based on 2019 revenues, the company’s revenues will need to grow by 98.4% for the next five years. Or, alternatively, if revenues grow at 50%, shares will need to fall to about $70 per share.
The lesson from this back-of-the-napkin calculation is clear: TSLA’s stock price has priced in not only its future growth as a financial analysis can calculate, but the softer, more qualitative value of Elon Musk’s intelligence, the company’s battery producing potential, and aggregate demand for Teslas. Believers in the company will argue that there is a fiendish desire for these cars, and Tesla cannot keep up. On top of that, Musk is smart, electric cars are the future, and a low-cost car will revolutionize the industry—and Tesla will be the one to bring such a car to market. While one can estimate the value of these things, such estimates are based more on guesses than on data.
This does not mean the bulls are wrong. It just means that the risk of them being wrong is extremely high. This is why TSLA has many aggressive bears who call the stock a bubble. But at the same time, this is also why TSLA’s valuations keep going up and up, even if guidance or revenues come in a little soft. This means that TSLA is a very hard short, but it is also a very risky long as well.
It’s no surprise that TSLA remains a very small portion of institutional investors’ portfolios, and it’s also no surprise if bears on the stock remain hesitant to short the name while the investment thesis remains dependent on emotions and speculation rather than financial data.