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Tesla and Mister Market: What's a Company Worth?

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I sold half my shares in Tesla (NASDAQ: TSLA) a few weeks ago, after seeing the share price skyrocket over the past few months. While many could give me kudos for "taking my winnings," others would rightfully chide me for selling out of such a great story so early.

Both would be right.

That's part of why I kept half my position. Tesla is a great story, and in a decade we may look back and see it as an amazing one: the first successful new American automaker in over a century. We could also look back on the ashes of another failed attempt to break the status quo. But honestly I didn't sell half of my position out of fear of failure, or retain half out of unreasonable expectations. I'm simply trying to understand how -- over time -- the market will value the company. 

Perspective on valuations

The easy view for one to take on Tesla today, and selling (or not buying) is how incredibly expensive shares have become in relation to the business itself. At the beginning of the year, the company was valued at around $4 billion. At close of market on June 29, the company was worth $12.6 billion, a 3-fold increase in a matter of months. Here we are today, with an incredibly high valuation for a company that will only have reached $1 billion in TTM sales for the first time ever, this quarter. 

In short, Mister Market seems to be pricing for perfection over the next few years, and I'm not convinced that Tesla can deliver on that. But with that said, there are other examples of companies that have carried very high valuations for sustained periods of time. 

Trying to catch the future

LinkedIn (NYSE: LNKD) is another fast-growing, industry-changing company that's using innovative technology to break the existing construct of a market. But where Tesla is leveraging the market for luxury cars to drive the cost of electric cars for the masses down, LinkedIn is using the power of social media to make it easier for both employers and prospective employees to connect to one another. Add in that it's a great place for professionals to connect with one another, and the network effect and first-mover status make for a tremendous investment opportunity. 

And if you think Tesla's expensive, LinkedIn is valued at nearly $19 billion and has generated barely over $1.1 billion through the past 12 months. But the lesson is that tremendous growth, and a chance to own a part of an industry changing company is a rare, and expensive, opportunity. 

Back to the future?

Amazon (NASDAQ: AMZN) could be a great object lesson for investors in both of these companies. One of the few great companies to come out of the dot com era as a success, it sported an enterprise value of close to $35 billion at the end of 1999. Within 2 years, its value had fallen to almost $4 billion, and shares were down 90%. Here's the rub: While Mister Market was freaking out, the company nearly doubled its sales. Simply put the bursting of the tech bubble sent shares crashing, despite the actual, real growth in the core business. By the end of 2003, sales had nearly doubled again, and the company had returned to its "expensive" status, with an enterprise value of over $21 billion. 

The funny thing about Amazon and its "insane valuation?" If you'd bought shares at the height of the market's insanity in 1999, you would be up 390%. TTM revenue was over $60 billion, and its market value is over $120 billion today. 

Foolish bottom line

It's worth mentioning that these are three very distinctly different businesses, and any kind of valuation comparison can be flawed because of that aspect. But getting caught up in that would be to miss the point: Don't get caught up in the market "being wrong" about a stock. Understanding how over time, Mister Market values a specific company, is a much more valuable approach. 

As to my decision to sell half my holdings? I'm a serious fan of Tesla, and I think it's combination of leadership, starting with Elon Musk, the approach that isn't about making an electric car so much as it's about making the best car it can, and targeting a segment of the market that will pay the premium for an amazing car, will establish it as a long-term leader, and a winner. I will re-invest the dollars of my sale back into Tesla at some point, and there's a very good chance I may pay more for those shares than I sold them for. But when I do buy back in, it will be with a better understanding of how the market values the company.

As to you, if you don't have a position in Tesla (or the other two companies discussed,) I think a small position has a place in any portfolio. These are three companies actively changing the industries that they play in. And while that doesn't come cheap, it can pay off hugely.

What do you think? Share in the comments below.

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Jason Hall owns shares of Amazon.com, LinkedIn, and Tesla Motors . The Motley Fool recommends Amazon.com, LinkedIn, and Tesla Motors . The Motley Fool owns shares of Amazon.com, LinkedIn, 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!

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