From time to time, I’ll get questions on Tesla (TSLA). Love it or hate it, Tesla has been shaking up the auto industry for a few years now. And CEO Elon Musk always knows how to keep Tesla in market headlines.
Take last week, when he tweeted that he had a buyer to take Tesla private at $420 per share. When you do the math, that amounts to more than $82 billion in market value.
As expected, Elon’s bold claim made waves on Wall Street. That afternoon, TSLA shares surged over 11%. The stock has since settled down as some investors took profits.
The latest news has caused my inbox to fill with questions about Tesla. Now that TSLA may go private, should we take advantage of this? I want to set the record straight, so let’s take a closer look at the details.
To start, let’s take a look at that $82 billion price tag. That is a staggering number for the auto industry, especially given that Tesla brought in less than $14 billion in sales last year. Consider this:
- Ford Motor Company (F) has a market cap of less than $39 billion. It brings in nearly $159 billion in annual sales.
- General Motors (GM) has a market cap of $52 billion and $144 billion in annual sales.
- Toyota Motor Corp. (TM) has a market cap of $206 billion, but it backs it up with $267 billion in annual sales. And, Toyota is considered the best managed auto maker in the world.
Now, Musk owns about 20% of the stock, so $66 billion would be required to take TSLA private. However, that’d still be a tall order to fill, and Elon Musk knows it. So it’s not surprising that he also announced that shareholders would have the option to remain invested in TSLA.
My take on this is that this mythical buyer doesn’t have the full $66 billion necessary to take Tesla private.
The reality is that Musk used his tweet to “squeeze” the shorts in Tesla last week. And that opened a big can of worms for him. The SEC is now investigating Musk, and he could very well be convicted for purposely squeezing short sellers without a material backer to go private.
Musk’s legal problems aside, Tesla’s financials are still abysmal. This quarter, the company is expected to post a loss of $0.40 per share. Then again, that may be too optimistic–some analysts expect Tesla to report a loss of $2.18 per share. Tesla has missed estimates two out of the past four quarters, so it’s hard to tell where it’ll fall in that range.
Another problem is that Tesla is starting to face some real competition in the electric car market. Toyota is a well-established pioneer of hybrid electric vehicles. And then there’s VW Group, which has an extensive lineup of “Tesla killers.” This includes the 2019 electric Audi E-Tron SUV, which will premier in San Francisco on September 17. There is also the Porsche Taycan, which Volkswagen is already accepting orders on.
These are just two of the first all-electric vehicles that VW Group is launching to “destroy” Tesla by offering quality electric vehicles at competitive prices. Frankly, I do not see how Tesla can survive with the onslaught of new, more efficient quality competitors coming from VW Group, Toyota, Nissan, Volvo, Jaguar, GM, and other major automakers.
To make matters worse, Tesla’s valuation is out of control. It currently trades over 123 times forecasted earnings. By comparison, Ford, General Motors and Toyota’s forward ratios are in the mid-to-upper single digits.
For these reasons, I don’t recommend getting caught up in the Tesla hype right now, no matter how tempting it may be. Instead, I consider TSLA a D-rated sell.