Following Tesla’s latest financial update yesterday, opinions are divided on the current valuation of the automaker’s stock price. Ahead of the press conference given by Tesla Motors CEO and founder Elon Musk, analysts on Wall Street already gave a small insight into the company’s current financial situation.
Tesla’s stock price soared after the immense success that followed the unveiling of its upcoming Tesla Model 3. With over 400,000 pre-orders until date, it is by far the most pre-ordered car in history. While the orders keep on coming in, it will be interesting to see how Tesla will cope with the huge demand and limited production capacity.
After a rally that ended in April, Tesla’s market capitalization was valued at about $31 billion. This is equivalent to $620,000 for every car the company delivered last year, or $63,000 for every car it is planning to produce in 2020. To put things into perspective, General Motors Co’s $48 billion market value translates to about $4,800 for every car it sold last year.
While all this seems great for Tesla, the overvaluation of the company’s stock – currently 125 times the expected earnings over the next 12 months – makes it especially lucrative to short sellers. This means stock moves quickly causing fluctuations in the company’s value, while in the end there is less real dedication and belief due to a lack of long-term investors.
Vilas Capital Management Chief Executive John Thompson, one of those short sellers, said he believes investors underestimate the hurdles Tesla faces trying to rapidly increase production, including the cost to build future high-end robotic assembly lines. “They’re going to have to spend an enormous amount of money on capital expenditures to achieve their long-term goals and they don’t have the money because they don’t have the earnings,” Thompson said. “So they’re going to have to sell stock to finance it.”
Until now Tesla have been losing an average of $3,000 to $4,000 for every Model S sold, which is interesting considering the company’s growth and rising stock prices. Musk indicated before that Tesla was founded to turn around the automotive industry and make the world a better and greener place rather than just making profit. Shareholders should not be investing in Tesla if they’re in it for the big bucks.
On the contrary this is exactly what has been happening over the past month – thanks to the successful release of the Model 3 – leading the stock price to where it is now. And there is more that should keep investors interested in Tesla’s stock, for example Musk’s promise from a while back. He promised that Tesla Motors would turn its first net profit in the 4th quarter of this year. Tesla sold 52,000 vehicles worldwide last year and expects to sell 500,000 vehicles annually by 2020.
However, such a large valuation inevitably brings plenty of risk to the company. Analysts say that there is no room for any setbacks that could jeopardize the company’s growth over the coming years. “This stock is definitely priced to perfection. If he pulls everything off, it’s probably worth its current value, but there’s a huge amount of execution risk here,” Georgetown Professor James Angel said.