Interesting Case Study on Telsa Motors

Summary

Market cap is higher than Ford’s and almost as high as GM’s, despite sales of $7B compared to $151.8B for Ford and $166.4B for GM.Too much hype in production targets and when the company will earn a profit.Current market price doesn't take into account potential negative news like vehicle recalls and setbacks in production goals, and shares should be hit hard should the bull market stall.

52-Week High: $313.73

52-Week Low: $178.19

Net Debt (in millions): $2,585

Last 12 months EPS: negative

Last 12 months revenue (in millions): $7,000

Target Price: $167.76

Rationale:

- IPO'd in 2010 at $17 a share and now selling at $305.60 (18 times higher).

- Never earned operating profit, free cash flow, net income, and had only one year of operating cash flow.

- Market cap is higher than Ford's (NYSE:F) and almost as high as GM's (NYSE:GM), despite sales of $7B compared to $151.8B for Ford and $166.4B for GM.

- Too much hype in production targets and when the company will earn a profit.

My catalysts for a 45% drop in price over the next two years are:

(1) Increased interest rates and higher cost of equity when this bull market comes to an end.

(2) Investors realize the overvalued stock and growth assumptions are too high.

(3) Current market price doesn't take into account negative news that can occur like vehicle recalls and setbacks in production goals.

Thesis

Tesla IPO'd on June 29, 2010 at $17 per share and has been one of Wall Street's favorite speculative growth stocks of this market cycle. The price per share today is $305.60, which is 18 times higher than its IPO price despite never earning an operating profit, never earning positive free cash flow, having only one year (2013) of positive operating cash flow, using debt to fund operations and diluting existing shareholders by raising equity. The market cap is almost equal to GM's and is higher than Ford's despite Tesla having revenue that is only 4% of what Ford's 2016 revenue was and what was GM's 2016 revenue.

There is too much hype in Tesla's forecasts of how many cars they will produce over the next five years, and when the company will become profitable. My catalysts are increased interest rates/higher cost of equity as the second longest bull market on record reverses its course, investors realize the overvalued stock and high growth assumptions, and any possible negative news.