This Is Why Tesla Stock Is Overpriced
A few weeks ago, I talked about how Tesla Motors Inc (NASDAQ:TSLA) stock was priced for perfection and overvalued, regardless of it was valued as an automaker or technology play. I stand by my assessment on TSLA stock.
Now many of you are probably saying I’m wrong and don’t know what I’m talking about in reference to the Tesla story.
TSLA supporters say how nice and technologically savvy the vehicle is. I agree; it’s a great car! But while I would buy the car, I can’t say the same about TSLA stock.
I just read today how the “Autopilot” function on a Tesla “Model S” saved a driver from getting sideswiped by a big truck. Again, I’m not questioning its superior technology. But it’s a different story with Tesla stock.
On Thursday, CEO Elon Musk was quite proud after reporting the company had close to 400,000 orders for its more affordable Tesla “Model 3.”
But instead of surging on the news, the stock didn’t do a whole lot. Much of the optimism was already priced into the stock after the initial sales metrics for the Model 3 were announced three weeks back.
On the same day Musk raved about the numbers, General Motors Company (NYSE:GM) jumped after reporting an impressive first quarter.
In the few weeks since I compared Tesla to GM stock, shares of TSLA have declined a bit from $251.00 per share back then compared to General Motors, which has advanced about 13% during that timeframe and is recovering its initial public offering (IPO) price of $33.00 from 2010.
The price divergence between TSLA and GM are shown on the following chart:
Chart courtesy of www.StockCharts.com
My Bull Thesis for GM
Now, before you TSLA stock supporters start to curse me, let me explain again why GM stock is a better opportunity in my view.
First, Tesla will have to deal with a much higher production run rate when the Model 3 is launched in its lines. This is a big factor, as Tesla has yet to convince me that it can deliver on time, given its demand for top-quality parts and simply not the kind you find at the local auto parts supplier.
Producing 60,000 to 70,000 cars annually is far different than 400,000 cars.
GM is fully versed in global supply chain management, as its parts tend to require lower technology.
Plus, General Motors makes more than 2.5 million vehicles annually.
In the first quarter, GM reported strong adjusted earnings of $1.26 per diluted share, well above the consensus of $1.00 per diluted share. GM’s revenue jumped 4.5% to $37.3 billion with expanding profit margins.
Now, the growth may not seem that great on the surface when compared to Tesla, but GM is much more profitable and trades at a far superior valuation.
General Motors earned $500 million in China’s flat auto market, which is far better than Tesla’s documented struggles there.
On a comparative basis, which I like to look at despite the fact many Tesla stockholders would argue it’s wrong, the contest isn’t even close.
GM trades at a mere 5.73 times (X) its 2017 earnings per share, 0.33X sales, and a price-to-earnings growth (PEG) ratio of 0.36. The automaker also pays out a current dividend yield of 4.75%.
These metrics are way below the valuation assigned to Tesla at 74X 2017 earnings, 8.16X sales, and a PEG of 5.57.
While TSLA stock is a much sexier trading stock, GM is looking like the kind of stock you could consider adding to your buy-and-hold portfolio to enjoy the capital appreciation and dividends. I doubt you can say the same for Tesla at this point.