Tesla Motors Inc: Forget the Model 3 Because TSLA Stock Is Overvalued

TSLA Stock Is Too ExpensiveTSLA Stock Is Too Expensive

Last time I discussed Tesla Motors Inc (NASDAQ:TSLA) stock was in May 2015, when the supercharged hyped-up stock was trading at $243.00 per share. TSLA stock has spiked on news that the company was working on its “Powerwall Home Battery” product that would propel revenue.

Tesla subsequently plummeted to $141.05 on February 5. This was prior to the stock staging a massive upward move to $268.34 last Thursday after the company announced it had received a $1,000 deposit for each of the 325,000 preorders of its more attractively priced “Tesla 3.”

The surge in TSLA stock towards its multi-year high at around $286.00 per share was not only driven by the news but also by the 32 million shorted shares, as short sellers scrambled to cover positions

On the chart, Tesla is looking to take another shot at its recent highs at the $280.00 level, last achieved on September 2014 and June 2015. However, I doubt TSLA stock will be able to hold on to gains above the $280.00+ level.

In the two previous breakouts, Tesla stock subsequently failed to hold and retrenched back to $180.00 and $141.00, respectively. In both cases, the moving average convergence/divergence (MACD) indicator turned bearish after the highs, as reflected on the following chart.

tesla motors nasdaq gs chart

Chart courtesy of www.StockCharts.com

Now I’m not saying Tesla will plummet back to $141.00, but $180.00 is definitely in the cards.

Before the many Tesla bulls turn on me, though, let me explain my thinking…

Tesla Stock Priced for Perfection

The reality is that TSLA stock is being priced as a technology stock, not a car company, which is the crux of the debate on the company’s valuation.

TSLA stock trades at a whopping 83 times (X) its 2017 earnings per share (EPS) and 8.39X sales, and has a price-to-earnings growth (PEG) ratio of 2.11. Even if it is valued as a technology stock, that valuation looks excessive. Conversely, when compared to the automakers, the valuation looks downright scary.

Consider that the value of Tesla assigned by the stock market at $34.0 billion implies it’s worth only about $11.0 billion less than General Motors Company (NYSE:GM).

Via a straight comparison based solely on the relative valuation and ignoring the growth metrics, GM trades at a mere 5.14X its 2017 EPS and 0.30X sales, and has a PEG ratio of 0.27. These are way below the valuation assigned to Tesla.

TSLA stock is also priced for perfection. The market is assuming it will have no issues ramping up production for its Model 3, which is expected to be delivered beginning in late 2017. This is at a time when the company cannot even deliver on its current production goals.

Tesla made 14,820 vehicles in the first quarter and is planning production of 80,000–90,000 this year. This will likely be a challenge, never mind quadrupling these numbers by 2018. Can you imagine that?

In comparison, GM produces more than 2.5 million cars each year. Its new and soon-to-be-launched all-electric “Chevy Bolt” will be delivered to the market before Tesla’s mass-market electric vehicle. While it’s clearly not as sexy as the Tesla 3, GM could really take it to Tesla by cutting prices on the Volt to heat up competition.

My view is whether you value Tesla as a technology company or an automaker, its valuation is ridiculous. I would not chase the stock higher. A drop back to $180.00 or below would be more intriguing but again, it’s not necessarily a bargain even at these lower prices.