Is Tesla’s Stock Over the Speed Limit?

With shares of Tesla Motors (NASDAQ:TSLA) trading at around $97.35, is TSLA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

It’s now well known that Consumer Reports gave the Model S a near-perfect score. This has led to a lot of excitement for Tesla. Other reasons for excitement have included Tesla’s first profitable quarter, phenomenal revenue growth, and CEO Elon Musk purchasing over 1 million shares of Tesla stock. The purchase was at $92.24, so he’s already doing pretty well. It should also be noted that Adam Jonas of Morgan Stanley (NYSE:MS) set a $109 price target on the stock. However, this wasn’t the traditional price target. It was more of an estimated value for the stock. Mr. Jonas noted that there could be much volatility prior to the stock reaching $109.

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Tesla is attempting to do something unique. It wants to sell directly to the consumer. Texas recently rejected the proposal, which was a setback, but this is going to be a long fight. What makes it an interesting fight is that while the dealerships are a force to be reckoned with, Elon Musk will have consumers on his side. If you read the comments to any article related to this topic, you will see that the vast majority of consumers would be in favor of direct sales. Put simply, consumers don’t trust car salesmen. Hopefully, Elon Musk will see that he has the potential of having massive public support. There is always strength in numbers. If the public demands a change, then it will eventually happen.

Some economists feel that current economic conditions favor Tesla. This is in regards to improved housing and stock market conditions as well as thawing credit. However, the housing boom is largely based on speculation. We know what happened last time there was a housing boom based on speculation. This round isn’t as broad-based and intense, but it would be difficult to argue that there is a genuine and family-based housing recovery. The stock market is a whole other story. Everyone has already formed their opinions, so there is no sense delving into it here. As far as credit goes, it has been improving. All that said, the consumer doesn’t seem to be strengthening much, and unemployment just ticked up to 7.6 percent. If the price for Tesla vehicles remains as high as they are now and the consumer doesn’t strengthen considerably, then it would be difficult to see the company reaching its full potential in the near future.

Tesla also has some scary numbers. The table chart below can offer more details on that front. The most important numbers (not seen on the chart below) is that Tesla has consistently lost money on an annual basis. Another important number is that Tesla is currently trading at 94 times forward earnings. That being the case, any significant and unexpected bad news will derail the stock in a vicious manner. The momentum is still up, but this makes Tesla a scary stock to own.

In regards to company culture, according to Glassdoor.com, employees have rated their employer a 3.3 of 5. A decent 64 percent of employees would recommend the company to a friend, and a relatively impressive 80 percent of employees approve of CEO Elon Musk.

The chart below compares fundamentals for Tesla, General Motors Company (NYSE:GM), and Toyota Motor Corporation (NYSE:TM)

TSLA GM TM
Trailing P/E N/A 11.81 14.83
Forward P/E 93.61 7.86 11.09
Profit Margin -31.23% 4.00% 4.36%
ROE -183.03% 15.20% 9.09%
Operating Cash Flow -138.70M 8.92B 31.15B
Dividend Yield N/A N/A 1.20%
Short Position 36.90% 7.40% N/A

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Tesla has outperformed its peers by wide margins over the past year, and that’s saying a lot.

1 Month Year-To-Date 1 Year 3 Year
TSLA 63.78% 187.7% 233.5% 0.10%
GM 8.77% 20.05% 58.54% 0.49%
TM -0.89% 22.26% 49.58% 65.27%

At $97.35, Tesla is trading well above its averages.

50-Day SMA 75.13
200-Day SMA 46.40
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E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Tesla is much weaker than the industry average of 0.80. If this doesn’t change, it has the potential to become a serious problem down the road.

Debt-To-Equity Cash Long-Term Debt
TSLA 2.70 214.42M 455.54M
GM 0.48 24.31B 18.42B
TM 1.11 30.73B 179.57B

E = Earnings Have Been Poor

Earnings haven’t improved much over the years. On the other hand, revenue growth has been very strong.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 15 112 117 204 413
Diluted EPS ($) NA -7.94 -3.04 -2.53 -3.69

Looking at the last quarter on a year-over-year basis, revenue and earnings both significantly improved.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 30.17 26.65 50.10 306.33 561.79
Diluted EPS ($) -0.86 -1.00 -1.05 -0.79 0.09

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Wall Street expects Q2 EPS of -$0.11 on $404.86 million in revenue. These would be substantial improvements on a year-over-year basis. The stock’s momentum is clearly higher, but with the stock trading at 94 times forward earnings, there are tremendous expectations to be met. Amazingly, Tesla has the potential to meet those expectations. However, Tesla has yet to prove that it can become a profitable company. Maintaining profitability will be extremely difficult in an economy where the vast majority of consumers can’t even consider buying a Tesla vehicle due to their high prices. The only long-term solution for Tesla is to find a way to cut the price tags on its vehicles. Elon Musk is a smart man, and it seems as though he’s constantly looking for ways to solve this problem. He might eventually figure it out, but it’s going to be a long and windy road.

Tesla’s stock might have more upside potential, but it’s highly unlikely that the stock will only move in one direction and maintain its current breakneck pace over the long haul.

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It has to be admitted that this story is currently impossible to figure out. There are too many uncertainties. That being the case, Tesla is a WAIT AND SEE. The Tesla story should become clearer over the next few quarters. The only certainty is that Tesla isn’t for the faint of heart or risk averse.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.