Tesla to Address Range Anxiety, But Investor Anxiety May Be Another Matter

Are the electric car company's shares priced beyond all reason?

ByABC News
March 18, 2015, 6:19 AM
Elon Musk is pictured speaking in front of a Tesla Model S in Detroit, Mich. on Jan. 12, 2010.
Elon Musk is pictured speaking in front of a Tesla Model S in Detroit, Mich. on Jan. 12, 2010.
Daniel Acker/Getty Images

— -- There is much talk these days about the bright future of electrically powered cars, and specifically about Tesla, the Palo Alto, California-based manufacturer of pricey electric models.

Tesla has become a story stock, a company whose share price has rocketed upward because of popular buzz and media attention rather than actual corporate performance.

In the case of Tesla, much of its media coverage is aimed at the company’s illustrious CEO Elon Musk and the cult of entrepreneurial personality that surrounds him. Musk, who started out with software and online service companies, has acquired a reputation as a visionary from the renown of Tesla and his Space Exploration Technologies Corp., aka Space-X, a space transport/services company.

Story stocks’ sky-high valuations often stem from perceived potential, not current performance, and Tesla falls squarely into this category. As a result, compared with that of large car companies, Tesla’s share price defies logic.

Companies can fudge a lot of numbers, but they can’t fudge sales. GM’s recent price-to-sales ratio has been around 40 cents on the dollar, and Ford’s, around 45 cents — with annual revenue of about $155 billion and $144 billion, respectively. Yet with revenue of only about $4 billion, Tesla’s recent price-to-sales has recently topped $8, catapulting the company’s market capitalization (the total value of outstanding shares) to a remarkable $25 billion, compared with $60 billion for GM and $65 billion for Ford.

Tesla investors pay 20 times as much as GM and Ford investors pay for sales. Is a dollar of Tesla sales worth 20 times the dollar of sales generated by GM or Ford? Unless Tesla’s financial performance improves dramatically, investors loading up on Tesla at such prices may be sorely disappointed when the bloom eventually falls off this rose and the stock’s valuation aligns with industry realities.

Nonetheless, Tesla shares remain priced up as the company has become a touchstone for ballyhooing the future of electric cars. Electric cars may someday rule the world, but that time currently isn’t foreseeable. Battery technology has a long way to go before it is light and efficient enough to power cars for long distances — a necessity for real success as long as technologies for rapid-charging stations and power grids that can handle them remain nothing more than futuristic visions.

Even as lower-priced Teslas come on the market, challenged by the far more affordable models emerging from other manufacturers, the limited range of Teslas makes them beyond the reach of people who can’t afford an additional car just for local use or short trips. Between $70,000 and more than $100,000 for a Tesla S is a lot for an individual to pay for a second car or for a family to pay for a third car for limited use. Moreover, electric cars in general suffer from resale woes owing to the allure of federal tax incentives for new purchases. When these incentives end, resale values may do better, but new sales could then suffer.