Crunching Tesla's Forward Multiple
Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a company's not making a profit, all the earnings multiples you could otherwise use to measure its performance become invalid. Tesla Motors (NASDAQ: TSLA) is one such case. But if it were making a profit, at what multiple would Tesla trade?
Understanding Tesla’s nature
In my previous post, I called Tesla "the Apple of auto industry." Just like Apple (NASDAQ: AAPL) is considered unique in its sphere, Tesla is also unique in many respects. I have already written a detailed thesis on Apple and shown how its different segments compete with different companies.
Had Tesla been a run-of-the-mill car manufacturer, our job of assigning a valuation multiple would have become much easier. That would have meant a straightaway forward P/E multiple of 9. I have reached that by averaging Ford’s (NYSE: F) and General Motor’s (NYSE: GM) forward multiple of 10 and 8, respectively. (In this article, wherever I use a forward multiple, it will be for the year 2014).
Therefore, we will have to compare Tesla with different companies to find a good estimate for Tesla’s forward multiple.
High-Growth Automakers: Tesla can be compared with high-growth automakers (including BYD, Geely (NASDAQOTH: GELYY) and Great Wall Motor), given that I expect the firm to be among the fastest-growing producers of automobiles in the coming years. I acknowledge that many of the world’s fastest-growing automakers are based in China, a market with its own set of dynamics, and which is expected to account for few Tesla sales in the coming years. One Chinese automaker – BYD (NASDAQOTH:BYDDY) – however, does have a significant electric vehicle focus. This is the same auto manufacturer, in which Warren Buffet bought a 10% stake for $230 million back in 2008.
Luxury Automakers: I mentioned in my previous post that Tesla’s Model S is not a conventional electric vehicle that comes with different compromises. Therefore, it should not be compared with the Volt, Fisker, and Leaf. Rather, it is a direct competitor of BMWs and Porsches of the auto world. Therefore, I compare Tesla with luxury automakers BMW and Daimler AG (NASDAQOTH:DDAIF) (producer of the Mercedes-Benz brand of vehicles), given similarity of vehicle price points and margin opportunity. I recognize that Daimler is a lesser-quality comparable than BMW, in terms of its diversification beyond the luxury vehicles.
Automotive Technology Innovators: Tesla can be compared with automotive-technology innovators like BorgWarner (NYSE: BWA), Harman International (NYSE: HAR), and Gentex (NASDAQ: GNTX), given these firms’ above-average margin and growth potential within the automotive space. These companies share another characteristic in common: Just like Tesla, these copmanies spend higher-than-average amount (in the automotive space) on the engineering, research, and development expenses.
Clean-Technology Companies: Tesla is considered to be a clean-technology company, given the zero tailpipe emission nature of its products, and the potential solar power aspect to its future charging stations. Therefore, Tesla can be compared with other clean-technology companies like Enernoc (NASDAQ: ENOC), First Solar (NASDAQ: FSLR), and SunPower (NASDAQ: SPWR). We know that Enernoc is levered in part to the development of a “smart grid,” in a similar vein to Tesla.
Disruptive-Technology Companies: This is an obvious comparison given Tesla’s achievement of bringing an electric car that is unique from all other conventional as electric cars. We can compare Tesla with disruptive-technology companies like Apple, Google, and Zipcar. Apple and Google have arguably now become the entrenched players themselves (which Tesla has not yet become in its industry). Therefore, along with Zipcar, we see how these companies have challenged entrenched players and ecosystems to gain traction. In this way, we will be able to understand how Tesla will be able to establish against the likes of Ford, GM and all other well-established automakers in the market.
Finally reaching to the multiple
The following chart shows the forward P/E multiples of different companies that we have compared with Tesla:
A 2014 P/E multiple of 21 and a forecasted EPS of $3.00 mean a target price of $63, which is almost 100% upside from the current levels. Therefore, I reiterate my buy recommendation on this stock.
AnalystX has no position in any stocks mentioned. The Motley Fool recommends Apple, BorgWarner, EnerNOC, Ford, General Motors Company, and Tesla Motors . The Motley Fool owns shares of Apple, EnerNOC, Ford, and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!