The Market Loves Tesla, but Analyst Opinions Are Mixed

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

No doubt about it, Tesla Motors (NASDAQ: TSLA) is the market's hottest stock. Up over 245% this year alone the company has made some investors very rich -- but after these gains, the stock and the company look overvalued. At current prices the company trades at 133 times forward earnings and nearly 80 times book value, for a value investors like me, these numbers appear unbelievable.

Many analysts on Wall Street are also worried about the surge in the share price, with the average price target around $85 per share. Bank of America has a price target of $39.

While many investors are willing to pay over $100 for Tesla shares, the market is not as bullish. Average analyst estimates for 2013 EPS, have been maintained between -$0.01 and -$0.30 for the past six months, despite the company's bullish outlook on the market. Moreover, earnings estimates for 2014, have been consistently revised downwards during the past six months, from $1.45 at the beginning of the year to $0.78 currently - that puts the company on a 2014 P/E ratio of 150.

At this high earnings multiple, Tesla needs to achieve a huge number of sales and according to Barron's: 

"Shares of Tesla Motors Inc.…could fall more than 50 percent unless the company can get stronger, cheaper batteries that will allow it to cut the $90,000-plus vehicle sticker price in half. The company's current Model S is too expensive to attract the hundreds of thousands of buyers each year needed to support the stock price…..the more affordable model Gen III that is expected in three years will have a less expensive battery, but a driving range that is too short to generate the sales that are priced into the stock."

The market is working against the company

Cheap oil and gas are flooding the US and working against Tesla. High oil prices and prices at the pump drive consumers to electric cars, cheap prices drive them towards the cheaper, and all around more convenient internal combustion engine.

According to industry analysts at Guggenheim Capital Markets, electronic vehicles are not expected to take a market share of more than a few percentage points before 2020. There is also growing competition in the market, albeit not in the same sector and target market that Tesla is working in.

To combat sluggish sales General Motors (NYSE: GM) has resorted to aggressive pricing, announcing incentives of up to $5,000 on the Chevrolet Volt, which sold 7,157 units in May. General Motors has also released the new Chevrolet Spark EV with a lower-than-expected starting price of $27,495 and is offering discounted lease rates on both the Volt and the Spark EV.

Meanwhile, Japanese automaker Nissan (NASDAQOTH: NSANY.PK), which has plowed $5 billion into battery-electric technology, has backed down from an earlier forecast of 10% market share for electric cars by 2020 as the company only sold 9,819 Leafs (the company's newest electric vehicle) last year in the US, well under its target of 20,000.

And there is more trouble to come with the BMW i3 and the Cadillac ELR both hitting the market later this year. Tesla still has its niche market, but is it enough to support its current stock price?

Future technology could make Tesla obsolete

Hydrogen fuel cells and natural gas are both more convenient fuels and both are becoming more popular as an alternative to electric vehicles. Daimler AG, Ford and Nissan plan to launch affordable hydrogen fuel cell cars within five years, while Toyota and BMW aim to do so by 2020. Fuel cells can cover more range and are cleaner than electric cars.

Investors should be worried. During June alone, one electric vehicle producer and two affiliates of failed US electric car maker Coda Automotive filed for bankruptcy. 

Foolish Summary

Tesla is a good company and its products are market leaders but to fulfill its current valuation, Tesla needs to achieve explosive sales growth over the next few years, a feat that many analysts believe the company cannot do.

China is already the world's largest auto market – and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free – just click here for instant access.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends General Motors and Tesla Motors . The Motley Fool owns shares of 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!

blog comments powered by Disqus