As I am writing this article, Tesla shares trade on the NASDAQ for around $750 each. Its market capitalisation is currently well over $100 billion and has overtaken Volkswagen as the second most valuable automotive company in the world. It is now second only to Toyota. This astonishing growth is the result of a really positive year for the EV company.
The price of Tesla shares fluctuated heavily over the past two years on average between the $250 and $350, with sudden movements happening at every minor news or report. The Model 3 ‘gamble’ worked out exactly as Elon Musk has predicted.
The new affordable and futuristic EV has been a big hit, but production issues hindered its success until mid-2018. Later, as the situation improved, and production numbers increased the model got the recognition Tesla hoped for. It was the best-selling premium-vehicle in the US in 2018.
Q1 of 2019 still saw slow sales and delayed deliveries to the following quarter. Production and deliveries have gradually improved throughout Q2 and Q3 with Model 3 substantially pulling up the entire company with 60,000 to 79,000 vehicles per quarter. Models S and X together did not reach the 20,000 units. Some issues and uncertain financial results drove Tesla shares valuation as low as $176. Along with this, the official presentation of the new Model Y has been delayed to 2020. This new crossover according to Musk should outsell all the other models combined, which is arguably likely considered the current market trend with SUVs and crossovers sales.
First of all two of the biggest commitment of early 2019 were maintained. The first was to sell between 360,000 and 400,000 vehicles in one year, 500,000 even, if deliveries in the new Gigafactory in China had started early enough. Tesla closed the year reaching sales of 367,500 units. Secondly, the Shanghai Gigafactory did not start its deliveries in 2019 but was indeed established very quickly, setting Tesla in a really favourable position for the future. Because now, not only it is within the largest automotive market in the world, but it is also an industry regulated by a Government that is investing massively in developing an EV infrastructure and market as quickly as possible. Moreover, avoiding import tariffs will likely play an important role in Tesla’s endeavour in China. Its shareholders and new investors showed their trust and satisfaction at this news right away. Its shares in just two days, from October 23rd to the 25th jumped from $250 to almost $330, as can be seen in the graph below.
Moreover, Tesla is the first foreign automotive company in history, to be allowed to set up a wholly-owned subsidiary in China without being imposed a 50-50 Joint Venture with a Chinese partner, as it happened to every other competitor before. This naturally grants the American company to preserve its technology and know-how while avoiding potential risks with tariffs and delivery costs.
In the meantime, Volkswagen Group has been gradually recovering the shareholders’ trust after the emission scandal of 2015 through a major rebranding and massive sales. Its figures this year reached almost 11 million units and has been steadily the highest or second highest-selling brand in the world for the past few years.
The new Gigafactory in Shanghai, as mentioned before, has definitely played an important role in this growth. Secondly, the marketing machine has worked well and consistently all the time. Whether it is the company with new achievements, innovative features, and unforeseen unveilings (i.e. roadster and cybertruck) or its peculiar owner grabbing the media attention with new entrepreneurial initiative, bold claims and even collaborations with social media stars, the spotlight on Tesla never turns off. It works like a proper clickbait machine. This factor made the share ‘hot’ (especially for speculators) but should alert investors.
There are different tools that can be used to select an investment-worthy stock. Rules defined and observed by some of the most successful investors in history, starting from the approach: ‘The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong’.
A starting point for growth-stocks whose excellent prospects are already well recognised is to look at the price-earnings ratio. Over an almost 10-year period Tesla, being a young company in a capital-intensive sector, rarely registered a profit, meaning its cyclically adjusted P/E ratio (CAPE) would be strongly negative and lose its significance. Despite the profit and positive EPS registered in Q3 and Q4 of 2019, the P/E ratio overall would still be negative.
A similar conclusion can be drawn for Tesla’s book value per share. The trend is observable for especially attractive companies, like tech or highly innovative ones. As they improve their prospects, the respective shares are likely to increase in price reflecting less and less their intrinsic value. For this reason, some companies, as great as they might be, risk becoming highly speculative exposing an investor to excessive fluctuation in their stock price which becomes largely unrelated to their actual book value. Finally, Tesla has never paid dividends to its shareholders.
This is just to mention a couple of observable metrics that (along with others) help reflecting a company’s position regardless of the future returns expectations of investors, especially after the entry in the Chinese market. Nevertheless, the trust of its shareholders shows confidence in this renewed industry growth potential but discounts some relevant external factors. Above all, the potential political risk for the Chinese domestic market.
The same metrics for the just overtaken VW, with shares trading at €165.6 and market cap at almost €82 billion, are instead much different. For instance, its CAPE (calculated in euro) is 7.02, with the emission scandal in 2015 that seriously affected the company’s financial outlook. For 2018 alone (2019 annual report is not available yet) is 6.97. VW has also a steady dividend payment record.
Finally, it is mainly due to the 2015 scandal then, that the company, despite the rebranding efforts and the aggressive electrification strategy has not regained yet its previous market value. So, on one hand, there is an attractive company that despite the production and financial difficulties is incredibly attractive and shows good prospects, on the other one that has probably still some time to go to completely recover from its wrongdoing despite the market success.
As of right now then, using value investing criteria, Tesla shares seem risky and significantly overpriced, even for the growth opportunity of the market. Along with the high volatility due in part to its great popularity, there are still numerous factors that could significantly hinder its growth both political and economic. Moreover, the competition in the EV segment is getting fiercer by the day, with new and improving alternatives, many of which just coming from China. The company’s track record is also unstable, even though relatively short and in a very capital-intensive industry. For this reason, while the company looks on a good path to become strong and consistently profitable, it is probably worth waiting for it to stabilise and see if some of these prospects will be realised even when the spotlight turns off. At that moment, Tesla might become a really solid investment in the industry.
Comment below if you don’t agree with this point of view, or if you agree but wish to add your perspective!
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