The normal full disclosure in any investment story revolves around whether the writer holds a certain investment. Instead, I disclose that I hold (or once did) a dim view of Tesla (NASDAQ:TSLA). For while TSLA stock has cruised for much of its history, I can sum up my disdain in one name: Elon Musk.
In the past I’ve referred to Tesla’s CEO as a slick car salesman, in no small part because of Musk’s inflated vehicle production targets and year after year after year of unprofitability. I did my homework on the guy some years back only to find that Musk failed in a string of business ventures he hyped with zeal, insouciant charm and occasional hints of lunacy. Like: “2001: Russians refused to sell him rockets to send mice or plants to Mars.”
But me-oh-mea culpa, for if Musk told me he could make money on a Mars mice mission today, I’d have to give it some serious thought. Because on Oct. 21, Tesla posted stronger-than-expected net earnings of 27 cents per share — capping off its fifth consecutive quarter in the black. How about number six? Regardless of whether that’s possible or probable, questions remain as to whether now is a solid time to buy TSLA stock, given that Musk’s electric investment bandwagon is filling up fast.
The Zoom Behind the TSLA Stock Boom
Yes, electric vehicles are hotter than ghost peppers yanked from Satan’s gob. What’s more, Tesla has cranked out its luxury cars long before this was the case. It hasn’t hurt that the brand has a super-loyal following. Proud (and sometimes snotty) Model S owners have long considered Musk an automotive Adonis, beating back critics and haters with the fierceness of cult members.
But the cars are good — fabulously good, in fact. The test team at Edmonds rated the 2020 Model 3 an 8.4 out of 10, with a 9 for drivability. Product-wise, this gives substance to Tesla stock, even if this cheaper Tesla model runs as high as $55,000. Tesla’s flagship Model S sells in nosebleed range, between $69,000 and $92,000. By way of comparison, $92K buys you a median-priced home in Akron, Ohio, which ain’t such a bad place when you consider it’s home to those New Wave immortals, Devo.
So, does Tesla stock have an engine to match its automotive products? That’s a somewhat loaded question. No doubt, and I mean none, the run-up over the last 12 months has been nothing short of jaw dropping. We’re talking 740%, with a single share now fetching $428.
Frightening Fundamentals
Yet the fundamentals should scare value investors, since Tesla’s price-to-earnings ratio is precariously high, at 1,128-to-1. To put that in perspective, stocks on the S&P 500 have historically ranged between 13-to-1 and 15-to-1; this means shares would trade at 13 to 15 times $1 of company earnings. So, would you pay $1,100 or so for a dollar’s worth of Tesla earnings? If you can afford one of those Model S rocket ships, I suppose I’m asking the wrong person. Otherwise, you have been warned.
That firmly established — and boy, I can’t believe I’m saying this — a broader look at the EV sector shows that many promising companies have yet to return any profit at all, so maybe Tesla deserves a break. Those in the red include Workhorse Group (NASDAQ:WKHS); Fisker, soon to merge with Spartan Energy Acquisition Corp. (NYSE:SPAQ); and Nikola Corp. (NASDAQ:NKLA). By the way: Nikola. Tesla. I can’t be the first to notice the deliberate association in the former’s name.
Yet heading into the home stretch of 2020, Tesla could cross the checkered flag with its first fully profitable calendar year. That’s amazing, considering an overall auto industry slump and a pandemic that’s knocked the wind out of consumer purchases on big-ticket items. How is Tesla doing it? Can it keep doing it? And most importantly: If you want to buy, is the price now so high that the electric ship has effectively sailed?
Tesla and the Investor’s Dilemma
While many a pundit relishes the role of confident prognosticator, I admit Tesla stock has me torn. I mean, 1,105-to-1? That price-to-earnings ratio gives me the willies, even if Tesla acolytes seem hell bent on propping up the House That Musk Built. That does say something, because they’ve been doing it reliably for at least six years now.
In addition, five straight quarters of profit says something about this EV maker gaining traction. TSLA stock likely sent a good signal as well with its 5-to-1 stock split in August. Looking at what analysts contend, let’s just say that they’ve been more like trumpeters.
Seven prominent firms have produced a buy consensus — but a median price target of $347, which actually would mark a drop of 19%. Credit this skewed result to a Tesla uber-bear, GLJ Research analyst Gordon Johnson, who has set a limbo-low price target of $19 per share. On the other end of things, Piper Sandler’s Alex Potter has set a record price target of $515.
I welcome you to put your money down and, Lord willing and the creek don’t rise, take home a killing. It could very well happen. As Eric McAlley, assistant teaching professor of finance at Quinnipiac University, recently wrote in an email to InvestorPlace about Tesla:
The primary factor driving Tesla’s high stock price relative to book value is the high expected future growth for the firm. … There is a famous quote from the legendary hockey player Wayne Gretsky when he stated that he ‘Skates to where the puck is going’ (rather than where it has been). In the case of Tesla, investors are skating to where the puck is going and this is why the stock price is so high relative to current earnings and book value.
But as for me, the swerving price targets and shaky numbers make me wary, as Tesla owes a good part of its mojo to its knack for headline grabbing and a celebrity CEO with a cool race car driver name. My investment, if I had the largesse to make it, would be to buy a Tesla Model S instead of shares of TSLA stock, at least for now. And if I could double my money through some other stock, that home in Akron is looking pretty tempting if the garage is big enough.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.