The Raw Story reported May 14 that Tesla (Nasdaq:TSLA) is worth more than Fiat (OTCBB:FIATY) despite the Italian carmaker producing 200 times as many cars. While Tesla is an amazing story its valuation has gotten frothy to say the least. Is now the time for shareholders to sell? I'll look at whether profit taking should be in your cards.
What A Difference A Week Makes
As of May 14, its stock had gained 49% in just four days of trading after announcing its first profitable quarter in the company's 10-year history. We're not even talking about a non-GAAP number but an honest to goodness GAAP result with revenue up 83% to $562 million and a net profit of $11.2 million. Morgan Stanley put a target price on its stock of $103 based on a combination of things including winning Motor Trend's car of the year, Consumer Reports giving the Model S a rating of 99 out of 100 and of course its first quarterly profit. With the 49% jump in less than a week it's now up 146% year-to-date and 172% over the past 52 weeks. It's hotter than a piston.
Tesla expects to deliver about 4,500 Model S vehicles in Q2 and 21,000 for all of 2013. In the first quarter its total gross margin was 17%, 900 basis points (BPs) higher than in the fourth quarter of 2012. By the end of 2013, it expects its gross margin to be 25% with all of it from the automobile itself and not through zero emission vehicle (ZEV) credits, which accounted for $68 million or 12% of revenue in the first quarter. Amazingly, Tesla's Model S sold more vehicles in the first quarter than the Mercedes S-Class, BMW 7 Series and the Audi A8. It's no wonder CEO and Founder Elon Musk is excited about the future.
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In the first quarter ended March 31, Tesla’s gross margin was higher than Ford (NYSE:F) and General Motors (NYSE:GM). Granted both did this on significantly higher volume, the potential improvement in Tesla’s gross margin to 25% by the end of the year on higher volume will do wonders for its bottom line. While 21,000 cars might not seem like a lot to Ford and GM, Elon Musk commented on its lower volume of cars: “We haven’t really tried to push volume super hard yet … I think you have to make sure the house is in order … before you push volume.” The whole point of the assembly line was to create a manufacturing process that is duplicable. Musk is simply ensuring that its system can deliver the same quality on 100,000 cars (or whatever number you want to insert) as it does on 21,000. You either see the merit of such a decision or you don’t. I see volume well beyond 21,000 in the years to come. Especially if it comes up with a model that’s more reasonably priced for the average car buyer.
Comparing Tesla’s financials to GM or Ford is a near-impossible task. With production only now starting to ramp up and profitability still hit or miss on a quarterly basis, anything earnings related is comparing apples and oranges. On a price-to-sales basis, Tesla’s currently trading at 10.2 times sales compared to 0.35 times for Ford and GM. If you’re a value investor, Tesla’s definitely not on your radar. If on the other hand you are a small- and mid-cap investor like Fidelity OTC you have it in your top 10 holdings. The Fidelity fund owns 4.75% of Tesla’s stock and has the largest position of any mutual fund. Investing in companies with future earnings growth that is superior to the market as a whole, the fund buys those stocks trading at a low valuation and/or exhibiting positive price momentum. Tesla is clearly the latter.
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Although Tesla is and will continue to be an American success story, it’s unreasonable to think it will ever produce as many cars as Ford, GM or even Fiat. That said, it’s pretty darn hard to deny its accomplishments. The Model S is just its second attempt at producing a car (Roadster was the first) and it’s nailed it according to Consumer Reports. That bodes well for the Model X and better yet, a four-door model for the average guy or gal.
So, should you take profits?
Only if you need the money. However, for those who feel compelled to realize gains, why not sell enough to recover your original investment and let the rest ride. Or you could buy some put options to protect your downside. Either way, as Elon Musk suggests, America needs more electric cars, and that includes the competition.
Generally I follow a growth-at-a-reasonable-price philosophy. Is Tesla’s stock price reasonable? Like Morgan Stanley, I believe it is.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.