The problem with TSLA is really valuation -- with a market valuation of $3.3 billion at its current stock price of around $35 per share, and assuming that they will knock the cover off the ball with the Model S launch in two years, it's still a very pricey stock for the automobile sector. For example, suppose that Tesla can sell 20,000 units of the Model S per year with a pre-tax net profit of $10,000 per vehicle (about a 20% margin -- excellent by any standard). In that case, pre-tax net profit on the Model S program would be $200 million per year, leaving perhaps $130 million after taxes are paid. Assuming zero profit on the Roadster program at that point, the Model S business, executed flawlessly, gives TSLA a price earnings ratio of close to 30x which is very high for an automobile company. I'm not taking into account the drive train business, but even if profits from that are $50 or $60 million per year it won't change the valuation all that much. In addition to the valuation problem even in the case of a perfect Model S launch, TSLA tends to give out lots of stock options to management and employees, a lot of which are probably already in the money. As those options get excercised, the number of shares outstanding will continue to increase driving up valuations further. Perhaps you are looking at a $4 billion dollar market cap then and a higher PER number... also, as the company matures, talented employees are less likely to be happy with lots of stock options which means salaries will rise which puts pressure on profits and further hurts valuations.
The potential of a buyout by Toyota or other big manufacturer is a wildcard which could present shareholders with a nice exit plan, but that's definately not a given. If Tesla does well in their business, it would be just as well for Toyota to continue partnering with them rather than buying them outright, both because it would be expensive and also because it buying the company could damage it wasting resources at both Toyota and Telsa. Neither company wants to go there I don't think... the other scenario would be that Tesla continues to lose money, is late with the Model S launch or is otherwise unable to make solid profit margins on each vehicle sold, and needs to be bought out in order to continue to operations. In that case, perhaps someone pays $3 billion or less to take it over meaning that at best TSLA is dead money for the next three years while shareholders wait for that scenario to unfold.
These are precisely the reasons why so much professional money is now shorting the stock as is mentioned in the Bloomberg article. Tesla is a great story and what it's doing is changing the industry permanently as well as doing genuine good for the planet. I would not have bought a Roadster if I did not think so and I am a huge supporter of the company. I'm amazed by the amount of talent they have been able to put together under one roof. However, these great attributes do not unfortunately make TSLA a good investment -- so maybe for now it's better just to buy a car from them and not invest in the stock! With stocks, however, you never know... I could well be wrong, and certainly I hope that I am. I may buy a few shares anyway....
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Originally Posted by roblab
