Shareholders of Tesla Motors (NASDAQ: TSLA) must be very happy as the share price has jumped significantly in a very short period of time. Since the middle of March 2013, Tesla has risen more than 3 times, from $35 per share to more than $110 per share. Should we invest in Tesla at these levels? Let's find out.
Turning to profitability and repaying government loans
I personally think that the market has been quite bullish about Tesla due to its recent strong first-quarter earnings results. After years of losses, Tesla finally reported GAAP profits. With 4,900 vehicles delivered in the first quarter, its automotive sales increased more than 18 times, from $30.2 million in the first quarter last year to nearly $561.8 million this year. Net income came in at $11.25 million, a big improvement compared to a loss of nearly $90 million last year. Actually, the positive net income was also due to a $10.7 million gain in the Department of Energy common stock warrant liability and another $6.4 million gain in the currency exchange.
Another positive point is that Tesla has repaid the loans from the Department of Energy that it had borrowed three years ago. The company reported that it is the only American auto business that has fully repaid the government’s loan. The company said that it had wired around $451.8 million to the government. The money it used to repay the government was from the recent common stock and convertible senior notes offering of $968 million. Tesla founder Elon Musk intended to purchase around $100 million worth of shares, including $45 million from the offering and $55 million directly from the company.
Model S – the best selling electric car in the U.S.
Electric car Tesla Model S is the hottest on the market right now. Recently, Consumer Reports announced that the Model S got the overall test score of 99 on a 100-point scale, meaning that it was nearly perfect. General Motors’ (NYSE: GM) Volt ranked second with more than 4,420 Volts in the first quarter, lagging Model S’ unit sales of more than 4,700.Ford’s (NYSE: F) electric car, Focus Electric, also got a decent review by Consumer Reports as being “solid, sophisticated and a delight to drive.” However, Ford Focus Electric’s sale came in at only 419 units in the first quarter. Combined with other hybrid versions, Ford’s sales ranked the fifth, after Tesla, General Motors, Nissan, and Toyota.
But extremely high PEG and P/S ratios
The market places a $12 billion market value on Tesla, which has generated $945 million in revenue and has reported an operating loss of $295 million in the past twelve months. Interestingly, Tesla’s market cap has risen significantly to be equivalent to 17% of Ford’s market cap and 22% of the General Motors’ market cap.
The market values Tesla at more than 10 times its sales and nearly 60 times its book value. Ford and General Motors, with $58.9 billion and $45.7 billion, respectively, in their total market caps, have much lower P/S and P/B ratios. While General Motors is worth 30% of its total sales and 172% of its book value, Ford is valued at 43% of its total sales and 3.34 times its book value.
Many investors would argue Tesla's high market valuation might be due to the high growth that it has experienced. However, its PEG ratio is also quite rich, as high as 42.7. Both Ford and General Motors have PEG ratios below 1, at 0.97 and 0.62, respectively.
My Foolish take
Although Tesla's Model S is hot and intriguing, ranking the best selling electric cars in the U.S. in the first quarter, I would not invest in Tesla at its current trading price. With an extremely high valuation, I would expect Tesla’s valuation would shrink in the near future. Among the three companies, I like General Motors the most, with a low valuation and the strongest balance sheet.