As I was walking down the street last Friday during lunchtime, I spotted a gorgeous red Tesla Model S driving down the road. I could not keep my eyes off it. The car just exudes sexiness within a 50 foot radius of its vicinity. The vehicle looks like those fancy futuristic cars, you see in the trade shows and movies, fused with today’s high-end luxury car. The sedan is just an amazing engineering and aesthetic work of art, and “sexy” is the only appropriate word to describe this masterpiece. All the other surrounding cars just pale in comparison to the sexiness of this electric-powered vehicle. Tesla’s are definitely the Apple’s of the automobile industry.
Almost every day, I look at my Stock Twits, Twitter, among my other mixed bag of financial investment app feeds only to find multiple comments about Tesla’s (TSLA) overvaluation in the stock market. I see comments asking “Why is Tesla so overvalued?” or “Is there any reason why Tesla’s stock is so high?” or comments like “The company just completed a secondary offering of $1.2 billion (indicating the lack of cash flow for the company’s future projects), yet shares continue to climb. What is going on?”
Through a simple calculation, we can see that based strictly on TSLA’s net assets, book values, along with net cash flows, the electric car manufacturing behemoth is absolutely overvalued. If we take the company’s enterprise value (pre-secondary offering) and divide it by the number of company shares outstanding, we can quickly come up with a rough fair value of TSLA’s shares.
Enterprise Value (Pre-Secondary Offering): $39.37 Billion
Divide by Number of Shares Outstanding: 163.09 Million Shares
We get an approximate Fair Value of: $241.40/Share
Yet as I am typing this post, TSLA is trading at $309.40/share in the market and continues to rise. So, what gives?
I have said this time and time again, when you invest in TSLA, you are not just buying stock in an automaker. You are actually putting your money on Elon Musk. Elon Musk has been publicized to be the next Steve Jobs, and we all saw what Steve Jobs did with Apple. Some investors and industry players would even go so far to say that Elon Musk is a bigger revolutionary than Steve Jobs. So, even though the stock is trading way above the company’s current net worth/fair value, investors are looking into the future of Tesla, believing that Elon Musk will be able to deliver on his vision of environmentally friendly and technologically advanced automobiles all over the world, along with affordable outer space-exploration and travel to the masses. (By the way, this could also be said of Jeff Bezos, who is an outstanding revolutionary, with Amazon.)
As of today, Tesla is the largest U.S. car maker in terms of market capitalization, replacing General Motors (GM), whose sales have been lagging, accompanied by concerns regarding the lack of growth in the U.S. market. Many car manufacturers reported sharp U.S. sales declines for March, in a year-over-year comparison. Tesla, in the other hand, recently reported a huge jump in sales during the first quarter of 2017. The car manufacturer indicated 25,000 deliveries of its high-tech vehicles in the quarter, which equates to about a 70% surge, compared to the first three months in 2016. This report not only signified an impressive first quarter for TSLA, but it also led Wall Street analysts to tout the auto maker’s ability to meet its 50,000 vehicle delivery goal by mid-year.
Some critics are still concerned with Tesla’s lack of profitability. Musk, in a recent address, states that TSLA can easily reach profitability by stopping all of Tesla’s innovation endeavors and putting an end to all research efforts on creating new automobiles and releasing fresh product-lines; however profits are not of his current concern. Most of the car manufacturer’s current expenditures go towards product modernization and advancement. Musk believes that research and development is the key to future and long-term success.