Based on the stock price performance, we should expect Tesla to bring about world peace.  Exciting growth situations, and I’ve seen many of them in various industries over my long career, seem to defy gravity for extended periods of time.

It wasn’t long ago that I warned about APPL becoming ridiculously popular (as a stock – we all know the devices had a huge following).  When it seems impossible to justify the price of the stock in the first place, and then it just keeps going higher – we’ve abandoned ‘financial’ reasoning and moved into the realm of imagination.  Nobody saw android coming….the blinders were on!

I’m the first to admit the vehicle is a beauty.  My first encounter with a live Model S was when I was touring on my Harley.  On route to Memphis, I stopped for a night in Indianapolis and there was this car parked in front of the hotel lobby.  I couldn’t help but gaze at the thing – a work of art on wheels to be sure.

The following quote is from USA Today, March 2, 2014

“Tesla Motors, which has seen its shares soar 619% in a year, has become the fastest growing automotive stock in at least two decades, a new analysis says.

As if that isn’t impressive enough, the analysis by Bloomberg News also finds that the electric car maker’s 15-fold increase in the value of its stock since its June, 2010, initial public offering is the biggest of any U.S. stock since 2006.” 

Rather than dwell on the fact that the automotive industry is hardly ‘tech’ (its extremely capital intensive and industry competition deeply rooted), let’s have some fun and try to come up with some sort of valuation metric.  Of course P/E isn’t much of a benchmark considering that most services (Yahoo Finance, Bloomberg) correctly provide a value of N/A (not applicable) or simply “-“.  Can we use the PEG ratio?

Considering what analysts are expecting in terms of earnings growth (see graph) the first difficulty is trying to pin down an earnings growth rate.  With the current price of the stock in the neighborhood of $250 we could pick the one year ‘estimated’ number and our PEG is like .36 and significantly less than 1X – a bargain?  Peter Lynch, who espoused the PEG ratio might say yes; since a ‘fairly’ priced stock should have a 1.0X PEG ratio.  It’s surprising the stock isn’t trading above $600 if you buy this sort of thinking.

On the other hand, even Peter Lynch might think it foolish to base your analysis on a one year estimate.  If we skip along to the three year estimate, then the PEG is far above 3X making the stock over-the-top valued.  If you’ve lots of experience working with earnings estimates like me, then you might expect all the growth rates projected will be wrong.  Now what?

STRIKE ONE:  A warning sign that’s worked for me over the years (helped me call the plunge in AAPL shares last year) is when research analysts begin looking for non-financial reasons to recommend stocks when they stubbornly keep going higher.  This from Morgan Stanley’s research analyst:

“Tesla’s quest to disrupt a trillion $ car industry offers an adjacent opportunity to disrupt a trillion $ electric utility industry,” he wrote in a new note to clients. “If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again.”

Jonas raised his target on Tesla to $320 from $153. The stock closed at $217 Monday, and it’s up 6% in pre-market trading.”

Analysts, who can fall in love with their ideas just like the rest of us, have a tendency to reach for reasons to keep the momentum going. Historically this has been one of the best red flags for an imminent short.  No mention of the costs associated with trying to keep up with demand (constrained by resources and time) on the one hand, and then messing with a completely new (even if related) battery operation.

STRIKE TWO:  Even the company sends me confusing messages.  The company’s CEO mentioned in the most recent quarterly earnings release:

“Operating expenses and capital expenditures will increase significantly in 2014, as we plan to invest in the long term growth of Tesla,” management said in the press release. “We plan to expand production capacity for Model S and Model X, invest in our store, service and Supercharger infrastructure, complete the development of Model X and start early design work on our third generation car.

Tesla also said that it will soon share more information about a Tesla Gigafactory that will lower battery costs.”

Call me crazy, but increasing costs and huge capital expenditures (to maybe someday lower operating costs) do not normally contribute to earnings growth and valuation.

STRIKE THREE:  How is it that Audi suffered years of reduced sales because it was accused of making automobiles that randomly accelerated on their own.  Audi’s U.S. sales plummeted from 74,061 in 1985 to 12,283 in 1991.  Toyota had similar issues twenty years later. In both instances, DOT studies discovered that ill-fitting floor mats or drivers pressing the wrong pedal caused the acceleration.   Another indication that hype trumps rational when it comes to Tesla?  It was not okay for a car to accelerate unexpectedly, but apparently it’s okay for a vehicle to burn up.