Finding Value In Tesla Motors Inc (TSLA) Suppliers

Finding Value In Tesla Motors Inc (TSLA) Suppliers

A July 30th article from FactSet Insight provides some interesting perspective on end-around value investing, that is, how to find value in an “overvalued” stock. The specific case under discussion here is Tesla Motors Inc (NASDAQ:TSLA), and the idea is to find value by investing in lesser known Tesla suppliers instead of the much-hyped and likely overvalued Tesla Motors.

Tesla overvalued?

The FactSet article points out that Tesla Motors Inc (NASDAQ:TSLA)’s sales growth and product pipeline “make compelling stories”, but the EV maker’s current sky-high valuation would make any sane investor think twice. Note that Tesla hasn’t generated sustained profits on a GAAP basis, and the firm is trading at a 12-month trailing price to sales ratio of 13.4. This compares to price-to-sales (“P/S”) ratios under 1.0 for General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) and Toyota Motor Corp (ADR) (NYSE:TM) (TYO:7203). The article also notes that Tesla is trading at almost 40% of the market cap of Ford, despite producing less than 2% of Ford’s sales.

Alluvial Fund May 2021 Performance Update

Alluvial FundAlluvial Fund performance update for the month ended May 2021. Q1 2021 hedge fund letters, conferences and more Dear Partners and Colleagues, Alluvial Fund, LP returned 5.4% in May, compared to 0.2% for the Russell 2000 and 1.0% for the MSCI World Small+MicroCap . . . SORRY! This content is exclusively for paying members. SIGN UP Read More

Strong sales growth

On the other hand, Tesla Motors Inc (NASDAQ:TSLA) is clearly growing rapidly. Sales were up almost 500% in 2013 after more than doubling in 2012. Moreover, the firm’s 160% three year, compound annual revenue growth rate in the second highest of any U.S. company with more than $1 billion in sales. Sales growth is anticipated to slow down a bit over the next year or two, but will likely ramp again soon as Tesla is planning to release a performance utility vehicle and a consumer-focused, sub-$40,000 sedan within the next three years.

Tesla suppliers identified by FactSet

Tesla Suppliers with share price

The FactSet article highlights several smaller Tesla Motors Inc (NASDAQ:TSLA) suppliers as potentially offering greater value. In specific, “OmniVision Technologies, which supplies the image sensor for the Model S rearview camera, Mentor Graphics, which provides software for its electronics systems, Bossard Holding, which is a Swiss company providing fasteners, engineering, and logistical services, and Hulamin Limited, which is an aluminum manufacturer (the Model S uses more aluminum than most cars).”

In terms of valuation metrics, Mentor Graphics currently has a P/S ratio of 2.0 and Bossard a 1.2 ratio; and OmniVision Technologies, Inc. (NASDAQ:OVTI) and Hulamin Limited (JSE:HLM) both have P/S ratios below 1.0. Furthermore, all four companies have revenues of $2 billion or less, and as the article notes, “a smaller size has the potential to better leverage exposure to Tesla’s growth.”

No posts to display