1 Reason To Avoid Tesla
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
1 Reason To Avoid Tesla
It’s Enormously Overvalued
Normally in these articles I talk about other things like profitability, cash flow, the affects coronavirus is having on a company’s financials, and other things.
But frankly none of those matter with Tesla (TSLA) due to its huge valuation.
As of this writing Tesla is a $286.5 billion market cap electric vehicle company.
This market cap makes Tesla the 16th largest public company in the world.
Ahead of the likes of…
- Bank of America
- Coca Cola
Just to name a few.
Its market cap is so large that its as valuable itself as the following 6 large automakers are worth combined.
- Toyota (TM) – $173.8 billion
- Ford (F) – $27.8 billion
- General Motors (GM) – $37.8 billion
- Fiat Chrysler (FCAU) – $21.9 billion
- Nissan Motor (NSANF) – $15.1 billion
- Kia Motors (KIMTF) – $12 billion
- Total = $288.4 billion.
But just how overvalued is Tesla?
Its current P/E is unreadable because its not earning a profit in terms of net income… The E part of the P/E ratio.
Its current P/CF is 103.5.
And its current forward P/E is 232.6.
The industry average based on the other 6 companies above on these metrics are as follows.
- Industry Average P/E – even when including Ford’s absurdly high P/E is 104.4.
- Industry Average P/E – without Ford’s P/E is 20.1
- Industry Average P/CF – 3.1
- Industry Average Forward P/E – For the ones that can be measured – 10.4
Tesla shatters these numbers.
Again, we can’t compare its P/E now – or even in the past 5 years – because Tesla’s never earned a net income profit.
It’s P/CF is 32.4X higher than the industry average.
And its forward P/E is 21.4X higher than the industry average.
I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…
Tesla even crushes that threshold.
Another way to put this is that in its entire lifetime Tesla’s sold an estimated 1.1 million vehicles worldwide from 2012 to today in the 3rd quarter of 2020.
When comparing this number to the market cap it shows the market is currently valuing Tesla at $260,454 per vehicle it sells.
The highest priced Tesla is around $100,000 at full price… And this doesn’t even exclude costs and expenses through labor, parts, and development to manufacture the car.
And these costs bring Tesla’s margins barely above 0% when it comes to operating profit and free cash flow production… In the trailing twelve months period its net profit margin is negative 0.6%.
In other words, the market is currently valuing Tesla as the 16th most valuable company in the world and its barely profitable.
I love Tesla vehicles and plan to make it my next vehicle purchase after test driving one earlier this year.
I love Tesla’s mission.
I deeply admire Elon Musk and personally think he’s one of the most important people living on Earth today because of everything he’s building in his various companies.
And I hope he continues pushing, innovating, and succeeding toward his goals of going to Mars and making Earth a better place to live.
But there’s zero chance I’m buying Tesla stock any time soon due to its otherworldly valuation.
I want as much of a margin of safety and room for error as possible when investing in stocks because bad stuff always happens at some point in a company and the world.
If you’re buying Tesla stock today there’s zero room for error due to its huge valuation.
And this makes it a risky investment today even though its likely to continue transforming the world.
For these reasons I recommend you stay far away from Tesla.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.