Disclosure: I have owned Tesla (TLSA) shares in the past but sold them over one year ago and made money; however, I did not make as much as if I had waited until the recent highs! (Better too early than too late!)
At $80 bln market cap / circa $90 bln enterprise value, stock investors are valuing Tesla at a level that is extremely difficult to support. The shares have gone from $185/share in May, as investors were very much focused on liquidity concerns, to close at over $450 this afternoon (Jan 6, 2020). It is hard for me to imagine that the company’s prospects have changed so dramatically – and favourably - in less than eight months. Either $185/share was way too low, or $450/share is way too high, or some combination. But I am erring on the side of the latter, so I would not buy the stock at this inflated level. Why? This post will provide my thoughts and rationale.
First of all, let me say that I although I completely endorse the concept of electric cars, manufacturing electric cars is certainly not unique to TSLA. Furthermore, the roll-out of electric vehicles is happening, but slowly, because the infrastructure supporting electric cars (i.e the road-side charging stations) has to be developed concurrently. According to this article on Wikipedia, highway-legal light-duty plug-in car sales reached 5 million units for 2018, versus only 2 million in 2016. That’s very good growth but must be put in the context of total light truck and car sales in 2018 of 78.6 million in 2018 (of which the US was 17.2 million units – see Statista) . As far as cars on the road, China is the largest market, with two million electric vehicles (excluding buses) at the end of 2018; the USA had an estimated one million electric vehicles at the end of 2018. Norway has the largest percentage of new electric vehicle sales at around 49% of all new car sales. So back to Tesla - TSLA was the first new automotive companies to focus exclusively on electric cars, and most folks believe that the company makes great cars. However, its share price history has been almost as erratic as its founder, Elon Musk. Let’s look first at the last five years of the company's share price performance:
Had you bought shares at the beginning of this period - at around $193/share - you would have most likely made money depending on when you sold, but the return would have varied dramatically depending on when you sold the position because the price has been very volatile over this period. Perhaps most notable on this graph is the fact that the shares have soared from a near-five year low on May 27, 2019 of around $185, to over $451 today (Jan 6, 2020), in only 7.5 months. Now that’s some real money, and real returns……had you been smart enough to see this coming.
In order to understand Tesla’s appreciation in its share price, let’s look at the performance of some other automotive company’s share performance over the same period.
Compared to other global automotive companies,Tesla is the clear winner, but only recently. If you had instead invested in a global automotive company with an emerging electric car division, you would not have done badly owning shares in Fiat Chrysler or Peugeot over the same period, noting that – unlike Tesla – both of these global automotive companies provide some downside protection by paying dividends (annual dividend yield for FCAU of 5.04% and for PEUGF of 3.49%).
Of the 29 analysts that Fidelity Investments provides research summaries for regarding TSLA, the breakdown in opinions of shares is:
· 4 Buy
· 4 Outperform
· 11 Neutral
· 4 Underperform
· 6 Sell
In “analyst speak”, that is a fairly bearish view on the shares in my opinion, although I am unsure when each analyst provided their last update (because I do not have access to this research).
But let’s turn back to Tesla. Looking at valuation, Tesla’s circa $90 bln of current enterprise value is :
$245,000 / vehicle (367,500 vehicles produced in 2019)
3.7x LTM revenues of $24.4 bln
39.7x EBITDA of $2.2bln
The table below compares Tesla’s figures as far as these three ratios to two other global automotive giants – Ford and BWM:
(1) For reference, the market value of Tesla’s equity at circa $80 bln is significantly larger than the market value of the equity of both Ford ($36 bln) and BMW ($53 bln).
Other attributes to consider are:
For Tesla, EBITDA / interest and net income are both negative (Ford and BMW positive)
Tesla had $13.3 bln of debt and $4.7 bln of unrestricted cash less customer deposits at end 3Q2019, of which $2 bln of cash was used to repay debt in Nov 2019 (significantly reducing available cash).
Recent capital markets activity has included $1.6 bln of convertible bonds (2% coupon / 27.5% conversion premium with shares at around $240/ share) and $750m of common stock in May 2019, showing it has access to the capital markets. TSLA has been proactive in ensuring it has cash on hand in order to address debt maturities and generally reduce its reliance on whims in the capital markets, which can be fickle.
S&P rates Tesla senior unsecured debt B- (positive since Nov 2019), and Moody’s rates the debt B3. The company’s 5.30% senior unsecured bonds due 2025 are currently trading at around 98.25 (YtW of 5.66%, vs BofAML yield for B-rated bonds across their universe of 5.20%). Like the shares, the bonds have rallied well off their lows of 81.375 just last May, before the large successful capital raise that month, as bond investors were worried before then about the company’s liquidity. These concerns have since eased, although it seems clear to me that Tesla will have to return to the capital markets soon to maintain its cash cushion, since it is still significantly cash flow negative and in an investment mode. (For reference, Ford's unsecured bond ratings are Ba1/BBB-, and BMW's are A1/A+, both significantly higher than the ratings of Tesla's.)
Operationally, as the table below illustrates from Tesla’s 3Q2019 presentation to investors - which I suggest the reader review - the company’s operating performance metrics are heading in the right direction. And lest you forget, Tesla is largely developing the battery technology itself and installing its own charging infrastructure to support its vehicle rollout, so it is not just about the vehicles the company is producing.
Taking all of this into consideration, I like Tesla as a company and am hoping for their continued success from a product perspective, and because their focus on electric cars has sparked the rest of the global automotive industry into much-needed action to reduce the world’s dependency on fossil fuels. But at this sort of valuation, I wouldn’t buy the shares. The company’s shares are valued like a fast-growing tech company, and I am not sure this makes sense. When gravity pulls the valuation closer to where they should be, which I’d “guestimate” to be closer to the $275-$325 level, then Tesla might get interesting again. Until then, there is asymmetric downside risk in the share price, although inevitably over time the company’s operating results will hopefully “grow” into the share price. If you are a long term investor and want to dip your toe, be prepared - you are almost certainly buying high, and will continue to experience rather wide gyrations in the share price in the coming quarters.
I want to say just one more thing, and that is that Elon Musk most certainly must be enjoying this run in price immensely, as he was ridiculed by the media for his infamous tweet on August 7th, 2018, suggesting that he had financing in place to take the company private at $420/share. The stock was then at around $355/share, and subsequently fell, reaching a low - as mentioned above - of $185/share in May 2019. But the more or less one-directional recovery in TSLA stock price began in May, with the shares closing above $400/share in early December, and reaching - and surpassing - the $420/share "buyout price" shortly thereafter. I realise Mr Musk must be taking great satisfaction in this, as I know he is emotionally invested in the company and 100% believes in the cause and ultimate success. But if I were him, I would probably sell into these levels, because I believe they are fleeting.
That’s my two cents worth. What do you think?