Earlier this week, rising automotive star Tesla Inc. (NASDAQ: TSLA) hit what many believed to be a major stock market milestone for the firm.
The company, which still has yet to commercialize a mass consumer vehicle, managed to surpass the market cap of iconic multinational automaker Ford Motor Company (NYSE: F).
Ahead of production of its much-anticipated Model 3 series, Tesla is now trading at an all-time high — around $45 billion in total share value. Ford has since inched its way back ahead, but only by a hair.
The price action has been enough to jolt Tesla’s army of undying fanboys into ecstatic, if not irrational celebration. In the days that followed, Albright Investment Group analyst Victor Dergunov went so far as to pose the question: “Will Tesla become a trillion-dollar company?”
For perspective, a trillion-dollar valuation would make Tesla about 20 times as valuable as Ford or GM are today. It’s a lofty number we honestly won’t even bother to entertain, but how about that $45 billion figure?
Priced to Perfection
Clearly, there’s plenty of optimism surrounding Tesla right now. The question, of course, is whether or not all the hype is warranted.
With a market capitalization on par with the world’s largest established automakers, Tesla will need to not only match but eventually exceed other automakers in earnings in order to justify its current valuation.
Time, as any seasoned investor understands, is a valuable thing. It’s not just about reaching the same level of revenue and earnings, but the time it will take to get there.
Every year Tesla investors are waiting for the firm to become profitable, Ford is padding its balance sheet and paying out a hefty ~5.0% dividend to shareholders.
This is what analysts call being “priced to perfection.” In other words, everything has to go exactly right in order to justify Tesla’s current valuation. Arguably, Tesla is priced even beyond perfection.
Of course, the argument fanboys will make is that Tesla is more than just a car company, which is why it’s worth paying the premium.
But there’s an even better case to be made that Tesla’s non-automotive ventures are more of a liability than they are an asset.
In Tesla’s latest financing round, the company issued 1.5 million shares and sold convertible notes, with net proceeds exceeding as much as $1.35 billion.
About half of that will disappear almost immediately as Tesla absorbs SolarCity’s debt. There will also be more cash bleed as Tesla absorbs SolarCity’s net losses every quarter. Last year, the burn rate was a whopping ~$400 million.
But even if SolarCity were profitable, it wouldn’t matter all that much anyway. SolarCity’s purchase price represents only about 5% of Tesla’s market cap. It’s a figurative drop in the bucket for the time being.
Sure, there may eventually be some synergies between the two segments, but it’s still way too early to regard the firm as anything but an automaker.
Could Tesla actually ever become the clean energy powerhouse Elon Musk wants you to believe it will? Of course it could… but the risk that it won’t makes the stock a particularly poor investment at current levels.
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Elon Musk: Hero or Thief?
To top everything off, it’s important to keep in mind that Tesla relies on $7,500 in taxpayer subsidies per vehicle. These subsidies are undeniably at risk with the madman himself, Donald Trump, at the helm and tax reform around the corner.
If Trump is good at anything, it’s smashing things, and with the EPA seeing massive department cuts, it’s not unreasonable to think Tesla’s subsidies, which it absolutely relies on, could soon disappear.
No doubt the environmentalist crowd will cry bloody murder if that ever happens, but let’s be frank: these are tax cuts for the elite. How many people do you know who can afford to drop $70,000 on a Model S?
Better yet, how many of those people deserve a $7,500 discount at the hand of the taxpayer for a vehicle Wired magazine reports damages the environment no less than carbon vehicles (once you dig a little deeper than simply looking at emissions)?
As Devonshire Research recently put it:
Tesla is built on loss-tolerant public money, but this will not be a solution in perpetuity. Eventually, Tesla will need to stand on its own or accept a role as a government-sponsored public good provider.
Tesla: The Worst Stock in the World?
As I’m sure you can tell by now, I’m not especially keen on Tesla’s current share price. My personal thesis is that the firm is overvalued by ~50%. And despite Tesla’s continues rise, I’m hardly alone in that opinion.
Popular news site The Street, for one, has unapologetically called Tesla “The Worst Stock in the World.”
Business Insider put out a piece in late February calling it “the riskiest stock in history.”
And even Elon Musk himself has commented that investors are being “very generous” with their valuation of the firm. Mind you, that was back when the company was trading at $170 a share, compared to $280 today.
In short, Tesla surpassing Ford in market cap isn’t a testament to Tesla so much as it is a testament to the market’s ability to generate hype.
Of course, there’s room for speculation in any portfolio, but you don’t do it with $45 billion corporations. By that size, you should be profitable already.
If you’re going to buy risky assets, there are two rules you should always follow: First, never invest more than you’re willing to lose. Second, stick to stocks with smaller market caps that actually have room to grow.
Until next time,