Has Tesla Hit Its Top Speed In 2013?

Tesla Motors (NASDAQ:TSLA) has surged almost 200 percent since its initial public offering price of $17 in 2010. Tesla’s visionary CEO Elon Musk has been touted by some as the “next Steve Jobs” and the company recently posted its first profitable quarter earlier this year. With that being said, the company has attracted its share of bears, as well. With relatively unproven profitability, but huge earnings potential, is Tesla an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s use relevant sections of our CHEAT SHEET framework to analyze the stock.

C = Catalysts for the Stock’s Movement

Tesla outperformed analyst expectations in the first quarter of 2013, reporting EPS of $0.12 and revenues of $562 million versus estimates at $0.04 and $499 million. Shares skyrocketed on this announcement, as well as news of an 83 percent increase in revenue from the previous quarter. Consumer Reports recently issued a rating of 99 for the Tesla model, 16 points higher than its chief competitor, the Porsche Panamera. Musk has projected that the third-generation Tesla Model S will be around 40 percent cheaper than the current model, which is priced at around $70,000, helping to attract a larger consumer-base and increase demand for the automobile.

Tesla’s distribution model is innovative, and apparently, in some states, illegal. Tesla has been battling auto dealers lately, as dealers have tried to pressure states into outlawing sales of Tesla vehicles. They argue that Tesla is in violation of existing state laws that prohibit auto manufacturers from acting as dealers. Tesla’s distribution model relies largely on consumers’ ability to order its vehicles online. Recently, Tesla won a temporary victory in New York, as the state government decided to shelve its decision of whether to ban Tesla sales; however, legislation in several states such as North Carolina and Texas is still pending.

A = A-level Management

Tesla CEO Elon Musk has a proven track record, co-founding the successful global e-commerce company PayPal. According to Glassdoor, 82 percent of employees approve of Musk as CEO. The entrepreneur has brought strong brand awareness to Tesla Motors with his celebrity-like media presence and his popular Twitter feed. The company has developed a devout following as evidenced by the popularity of the website.

Last week, Tesla recalled around 1,200 Model S cars for a defective mounting bracket. Musk’s handling of this recall was masterful — authoring the announcement himself on the company website. Owners of the recalled models were promised that their cars would be returned within and were all given a loaner vehicle for the time period. The recent Tesla recall contrasts sharply with other notable automotive recalls from the likes of GM (NYSE:GM) and Toyota (NYSE:TM) that resulted in public relations problems for the companies. Under Musk’s leadership, Tesla’s share price actually rose around 2 percent that same day.

E = Exceptional Performance Relative to Peers?

Tesla is extraordinarily expensive when compared to competitors GM and Toyota, trading at a forward P/E of around ten times that of Toyota and around 16 times that of GM. The more appropriate metric for automotive companies may be the price to sales ratio. We can see from the chart below that Tesla is trading at an extremely high price to sales ratio as well. Based on estimates of five-year growth rates, it seems that analysts believe that Toyota actually has higher growth potential than Tesla.

  Tesla GM Toyota
Price to Sales 12.17 0.29 0.68
Forward P/E 115.06 7.22 11.31
5-year Est. Growth 32.9% 15.5% 44.9%

T = Technicals are Strong

Tesla’s stock is currently trading around $99, above both its 50-day moving average of $90.48 and its 200-day moving average of $51.67. As you can see from Tesla’s chart, the share price has experienced remarkable growth over the past year and has grown exponentially since the company announced their profitable first quarter in April. Potential investors should note the rather large short interest that Tesla has garnered at 29.8 percent of outstanding shares. A sizable percentage of the stock’s surge earlier this year was from short sellers covering their positions, rather than from long-term investment activity.

Conclusion

CEO Elon Musk has stated that Tesla expects to produce 25,000 vehicles by the end of the year and 500,000 vehicles per year in the long term. While skeptics may assert that these projections are not based in fact, Tesla will certainly continue to see high sales growth, especially as it increases its presence overseas. Tesla’s growth prospects may justify its large price to earnings and price to sales premiums, but this has yet to be seen.

If Musk can deliver on his promises of a more competitively priced third-generation Model S, and a reliable nationwide network of ‘supercharger’ stations, Tesla could move from a niche brand to a permanent fixture in the American automotive landscape. Tesla is relatively unproven from a profitability standpoint and faces more challenges as the year progresses. The company could be a good buy for a growth investor with a high risk tolerance. However, Tesla’s short-term earnings outlook does not justify such a high share price. The future looks bright for Tesla and Mr. Musk, but for now, because demand for its cars is relatively uncertain, Tesla is a WAIT AND SEE.

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.

More from The Cheat Sheet