Right now we’re seeing something interesting happen with two companies with stocks that took off this year. The CEOs of both Tesla Motors Inc (NASDAQ:TSLA) and Netflix, Inc. (NASDAQ:NFLX) have warned investors that they think shares of their own companies are too high.
CEOs warning about stock prices
Tesla CEO Elon Musk has said twice this year that he thinks the automaker’s share price is “more than we [Tesla] have any right to deserve.” So why would Tesla Motors Inc (NASDAQ:TSLA)’s and Netflix’s CEOs warn about their share price? It seems counterintuitive, but it really isn’t. When share prices climb as high as both companies’ have, then there’s a very high set of expectations which go with those increases. It’s a good thing for companies to beat expectations, but the higher those expectations get, the more difficult it will be to beat them.
The fact that Musk and Netflix, Inc. (NASDAQ:NFLX) CEO Reed Hastings warned investors of their companies’ stock prices doesn’t mean they’re worried about meeting their goals. It simply means that they’re concerned that investors are beginning to have unrealistic expectations of their futures. And as Seeking Alpha contributor NYC Trader suggests, the bull case is based on estimations for sales seven years from now for a car which doesn’t even exist yet. While I personally like Tesla very much (as does the Seeking Alpha contributor), this certainly highlights how irrational some investors have become.
Undoubtedly some are wanting to get in on Tesla Motors Inc (NASDAQ:TSLA) early in the life of the company in hopes of future success. There have been stories of people who invested in Tesla in its earliest days as a public company who have now become millionaires. However, the more shares rise right now, the smaller those future gains may be and the further into the future those gains may go. For long-term investors, this may not be a huge deal, but there may be rough waters ahead if Tesla can “only” meet expectations in the near term.
The power of market disruption
The Seeking Alpha contributor offers a few examples of companies with stock prices that climbed to great heights, only to fall off significantly. eBay Inc (NASDAQ:EBAY), for example, offered a disruption in the e-commerce market. The company lost approximately 75% of its value between 2004 and 2008.
Netflix, Inc. (NASDAQ:NFLX) shares climbed from $50 to $300 between 2010 and 2011, only to fall down to the $70 range by the end of 2011. The company’s shares are now up over $300, and its CEO is naturally concerned.
Valuing Tesla’s Model E
As mentioned earlier, the bullish case for Tesla Motors Inc (NASDAQ:TSLA) is based on sales for the mass market Model E car, which won’t even be on the road for years. There’s not even a prototype built yet. Bulls are projecting sales for 2020, which is pretty difficult to do. And they’re trading on forward multiples from 2020 without discounting for potential disks. The post estimates that in 2020, Tesla could be worth around $166 per share, which is around what it’s trading at now. In other words, the automaker’s share could trade flat for the next few years—assuming it hits all of its targets and that investors don’t dump their shares because they get tired of waiting for it to go up.
In his bullish case, Tesla Motors Inc (NASDAQ:TSLA) sells 156,000 EVs in the U.S., capturing 32% of his projected market with an average selling price of between $55,000 for the Model E, Model S and Model X, depending on mix of vehicles and whether it’s a domestic or international sale. Revenue would be $15 billion in 2020, and the company would see a net income of $1.2 billion with a 20% gross margin and 10% operating margin. He’s estimating a multiple of 22 times earnings and 160 million shares outstanding.
So the question remains: how high is too high for Tesla Motors Inc (NASDAQ:TSLA) right now?