Tesla's Valuation Continues To Defy Logic

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Throughout the history of investing in stocks, a great divide has always existed between the balance sheet (book value) and income statement (net income). A company with a low book value can obtain a significant market value due to high expectations of future earnings . Conversely, a company with a high book value and limited earnings potential will usually obtain a low market valuation. While the latter is typically a low risk stock backed by assets, it can't usually be given away to market participants at any valuation. On the flip side, the opposite stock can reach extreme valuations even with no fundamentally reason to back up the sky-high price.

Tesla             Motors ( TSLA             ) fits into an extreme version of the prior scenario of limited book value and perceived high earnings potential leading to a sky-high valuation. Whenever any investor thinks about the potential of the elective vehicle category and whether battery advancements can improve the performance, distance and more importantly price, one can't argue that a large void exists between where Tesla's stock sits and where it will land in the occasion of a disappointing event.

Questions On Performance

A real debate exists between numerous media outlets, analysts and even contributors on Seeking Alpha. The promise of a cleaner and more environmentally friendly source always pulls in the bulls. The bears question whether electricity is that clean when sourced from a coal-based electric grid and the use of environmentally unfriendly batteries.

Lately, CNBC regularly reports on the three Tesla             vehicles to catch fire and fellow SA contributor John Petersen has written numerous articles regarding battery limitations and questionable accounting. While analysts such as Deutsche Bank's Dan Galves placed a $200 price target on the stock based on strong order flows from China, improved gross margins and leverage, and a resolution on fires.

The debate is fierce and interesting, but ultimately it should take place at a more balanced stock price.

Comparative Valuations

Going back to determining value based on a combination of assets and the earnings potential of those assets, Tesla             provides some scary numbers for current bulls. For a comparative valuation, both valuation metrics will be utilized to see if Tesla             has any valuation versus the hottest stocks in the domestic markets. In this case, the valuations were compared to Facebook             ( FB             ), 3D Systems ( DDD             ), Netflix             ( NFLX             ), Yelp (YELP), and Workday             ( WDAY             ). In essence, the hottest stocks in social media, 3D printing and cloud software, yet Tesla             generates some off-the-chart numbers.

Over the last three years, the price-to-book value multiple has been extremely high. In reality, Tesla             has limited book value and investors would obtain no value if an unexpected event were to hit the company. Compared to even the hottest social media and software stocks, Tesla             flies off the chart. Compared to the other hot industrial stock in 3D Systems, one gets the impression that 3D Systems might need to be revisited as a potential value stock.


Tesla             competes in a highly competitive auto industry and offers very little in value to investors. It would need to generate strong profit growth for years to bring the book value up to a reasonable level. The question investors need to ask is why one would purchase the most expensive stock in the group with the lowest long-term earnings growth? The answer is that rational investors won't touch Tesla             Motors with a valuation that still defies logic. No stock should trade at 27x book value and especially in an industry like autos that will prevent supersonic-type growth going forward.
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