Tesla Motors Inc (NASDAQ:TSLA) is a great company, there’s no doubt about that. The firm’s achievements are many, and well enough known that we probably don’t need to list them. Tesla stock, on the other hand, may not be all that great. The firm’s shares are up again on today’s market, but one writer at Forbes thinks the company may be in bubble territory.
David Trainer reckons investors “should avoid Tesla Motors Inc (NASDAQ:TSLA), and those holding the stock should sell and enjoy their profits.” He may be right. The firm’s value has quintupled in the last twelve months, and most of that has come since the start of this year. There’s very few problems with Trainer’s argument.
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Tesla stock options and profitability
Tesla Motors Inc (NASDAQ:TSLA) investors should be looking at employee stock options according to Trainer. the firm had $25 million outstanding stock options at the end of 2012, according to the company’s regulatory filings. Trainer calculates that those are worth around $3.1 billion today, or close to a fifth of the firm’s market cap. Investors are, according to the piece, ignoring the possible dilution that could result from those options.
The second, and more important, argument that Trainer makes concerns Tesla Motors Inc (NASDAQ:TSLA) profitability. The company has yet to demonstrate consistent profitability, and expectations are high. According to Trainer’s analysis, the firm requires 35% revenue growth every year for a decade to justify its current valuation.
Investing and speculation
There are few models that justify Tesla Motors Inc (NASDAQ:TSLA) having a market cap of $18 billion in August 2013. The company may be a real force in the auto market in the coming years, but there are huge risks, and competition is frantic. The car market is made up of a lot of big players. Tesla Motors does not have their advantages.
According to Google finance, Tesla trading volume for today is at 3.62 million. All of those shares were sold for just under $150 a pop. The people buying them are not looking at profitability models and cash flow projections. They are either betting the market will continue to increase the price, so they can sell later, or they’re investing in a fantasy.
The risks involved in the Tesla Motors Inc (NASDAQ:TSLA) business, coupled with the company’s high valuation, mean a $150 share price is unjustifiable. It’s based on momentum. Those who bet on momentum are not investors, they’re speculators.