New Jersey threw Tesla Motors (TSLA) for a loop Tuesday in passing a new rule that the electric-car maker can only sell its cars through franchised dealers and not directly to customers. While Tesla investors may worry this could hurt sales, they should be more concerned about the company’s sky-high stock price crashing to the ground.
New Jersey is a very small state. Potential buyers can shop online and take a short trip to a more Tesla-friendly state to pick it up. Arizona and Texas have also banned direct sales to consumers. Coincidentally they are both also competing to be the home for Tesla’s battery factory, where it will produce batteries.
Tesla shares raced ahead 56% year to date and a mind-blowing 500% in the past 12 months, as of Wednesday. It has returned 114% annualized the past three years. It has yet to turn a profit and therefore has no price-to-earnings ratio. It trades at 43 times book value and 14 times sales, according to Morningstar. Those are sky high compared with the industry’s average price-to-book value ratio of 1.5 and price-to-sales of 0.6. The S&P 500 trades at 2.6 times book value and 1.7 times sales. Total sales blasted 487% in 2013, as Tesla boosted Model S all-electric vehicle production in the U.S. and overseas. internationally. S&P Capital IQ projects Tesla’s sales to speed up 83% in 2014.
Tesla shares are significantly overvalued, according to Bank of America Merrill Lynch analysts. They rate the stock underperform with a $75 a share price target.
“Tesla’s 2013 reported, adjusted EPS (earnings per share) was $0.78,” John Lovallo and John Murphy, research analysts at BoA Merrill, wrote in client note March 11. “However, we estimate that, excluding the benefits of ZEV (Zero Emission Vehicle) credits, ‘other’ regulatory credits, and add backs for stock compensation and lease accounting, Tesla’s EPS from its core automotive business was a loss of $1.93 a share on a fully diluted basis. Therefore, we remind investors that while the company has made meaningful progress over the past couple of years, we believe headwinds and substantial risk remain.”
Investors should pull the plug on their Tesla position, says S&P Capital IQ. It rates Tesla sell with a $200 price target.
“Certain costs should rise as the company expands internationally as it invests in technology and infrastructure for the upcoming Model X SUV,” Efraim Levy, an analysts at S&P Capital IQ wrote in a note March 8. “Energy credits, which have better margins than production, should shrink as a proportion of automotive sales and profit.”
Tesla’s stock price closed at $241.49 on Wednesday or three times above BofA Merrill’s target and 21% above S&P’s. Investors should worry that the stock could drop about 70% to be fairly valued, at least by BofA’s estimates, and not New Jersey. The Garden State is home to only 3% of the U.S. population. Loss of sales there would be a tiny dent considered normal wear and tear on a car.
Tesla projects it will sell 35,000 Model S sedans in 2014, 55% more than in 2013 figure. But demand for the Model S far outstrips supply because of the limited production capacity for the batteries made by Panasonic. Demand will like zoom ahead many times when the lower priced Gen III model is rolled out in 2017, Trefis, an equity research firm, wrote a client note March 10.
Trefis projects Tesla can make 20,000 to 25,000 Gen III vehicles with a sticker price of $35,000 to $40,000. Tesla plans to produce its own batteries starting 2017. Battery costs could drop by 30% the first year of production, Trefis forecasts.
Investors are betting on Tesla’s high-voltage future. Trefis says the Giga Factory could radically change the power industry by selling surplus batters to the electronic industry. could even provide surplus batteries to the electronic industry and perhaps become the leading energy-storage producer.
Among the 12 analysts polled by Thomson Reuters, five rated Tesla shares buy or outperform, six rated it hold and one rated it underperform. Their target stock price ranges from $75 to a sky-high level of $325 a share with a mean of $227. Tesla’s conflict with New Jersey should not worry investors given that the stock price could easily drive off a cliff just to reach fair value.
By Trang Ho