We reported recently on the recent decline in shares of Tesla (TSLA - Free Report) after it was announced that CEO Elon Musk had been charged with fraud in a suit filed by the SEC and the immediate rebound after it was announced that Musk had entered into an agreement to settle those charges and remain CEO of the company.
Investors then turned their focus to the release of Q3 production and delivery numbers which was scheduled for early this week. In an 8-K filed on Tuesday with the SEC, Tesla reported production and delivery figures that were basically identical to analyst expectations.
In the quarter ending September 30th, Tesla produced 80,142 vehicles, including 53,239 Model 3s, and 26,903 Model S and Model X vehicles. Deliveries to customers totaled 55,840 Model 3 and 27,660 of the Model S and X.
Those figures were all very close to consensus estimates and would seem too indicate that for all of the growing pains and other distractions lately, Tesla is making significant strides toward its goal of being the largest automaker in the world.
Shares in Tesla were trading lower by just over 2% at mid-day Tuesday, largely on concerns about the effect of tariffs on potential future sales in China – which is seen as the largest potential market in the world for electric vehicles.
Tesla reported that due to government cash incentives on locally produced vehicles, import tariffs and the cost of overseas shipping, they were operating at a 55-60% retail price disadvantage in China when compared to similar Chinese vehicles.
Tesla has previously announced plans for a solely-owned Gigafactory in Shanghai that will eventually produce up to 500,000 vehicles and would reduce or eliminate the price premiums, though even the most optimistic forecasts put the start of Chinese production 2-3 years away.
“Growing Into” the Valuation
The topic of whether Tesla’s valuation is reasonable or not has been hotly contested for the past few years as its market capitalization has surpassed $53 billion, even though Tesla has yet to turn a profit. That’s higher than General Motors (GM) at $48B or Ford (F) at $37B. Combined, those two American automakers produce about 16 million vehicles per year. Even extrapolating Q3 sales into the future, Tesla will sell less than 300,000.
Price to Earnings Ratio is not particularly useful for comparing the valuation of young companies who are growing rapidly and investing all of their gross profits - and more - into the expansion, resulting in net losses. Price to Sales can be a better indicator as it excludes investment and depicts a more accurate representation of the trajectory of gross revenues with relation to share prices. Tesla currently trades at a Price to Sales Ratio of 3.9X, still considerably higher than the domestic automaker industry at 0.6X.
Even analysis of the balance sheet can be complicated because some investments – Capital Expenditures like factories and machinery – are represented there, while other expenses – like hiring and training employees – do not.
Overall, Tuesday’s muted reaction in the share price to the company meeting expanding sales goals is probably an indication of a gradual move toward a more conventional valuation for Tesla.
Healthy growth companies can trade at high multiples for a long time as long as they exhibit the potential for significant earnings in the future, but unless the earnings catch up to the share price at some point, even the most ardent believers tend to lose patience eventually.
We are still about a month away from Tesla’s next quarterly earnings release. We now know exactly how many cars they sold, but it remains to be seen how much it cost them to do so. Analysts will dissect the report for the gross margins achieved on those autos, as well as any indications about the sustainability of cash flows and the rate at which the company is burning through cash reserves.
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