Tuesday is a red letter day for Tesla: the stock crossed the $200 threshold.
Shares of the carmaker jumped on news that China will cut its subsidies for electric cars by 5% this year rather than the 10% expected earlier. The People's Republic currently chips in the equivalent of $5,775 to $9,900 on purchases of electric cars, comparable to the $7,500 given by the US government. Tesla plans on selling its cars in China starting next month.
The good news for Tesla sales means great news for the stock, which hit its record highs on Tuesday. So far this year, Tesla is up 34%. In 2013, shares in the electric car company were up 344%.
With a market cap of $24 billion, Tesla is now valued at roughly half of General Motors. Of course, that doesn't mean the two have nearly the same sales. In the past year, Tesla sold 22,450 vehicles versus 2.8 million sold by GM. In other words, GM sells the equivalent of a year for Tesla every three days.
According to John Stephenson, portfolio manager at First Asset Investment Management, Tesla isn't worth its current price.
"The reality is this is just ridiculous in terms of valuation," says Stephenson about Tesla's price-to-forward earnings ratio, currently at 125. "They would have to sell 15 times cars – 330,000 more cars – at 12.5% margins just to justify their current valuations. They're nowhere near that. The best-case scenario is they get there in 16 years. This is crazy. They're talking about margins of 25% on their Model S. When you consider what BMW and Mercedes are doing, their margins are in the 5.8% to 6.5% range."
Stephenson notes that Mercedes was only able to sell 25,000 vehicles above $70,000 last year, which is about the lowest price for Tesla's Model S.
But, valuing the company as a tech stock instead of a car company also has its limits when it comes to Tesla, according to Stephenson.
"There's no way that the battery technology [with Tesla] is anywhere near mass market," say Stephenson. "What allows technology companies to continue having those lofty valuations is they grow into it. [Tesla] is something that won't grow into it."
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, believes the charts are telling another story from Stephenson's dire prediction.
"Whatever you think about the company, the chart is telling me the stock wants to go higher," says Ross. The stock consistently held above its 200-day moving average last year, notes Ross, a bullish long-term signal.
After forming a wedge pattern beginning the late summer of 2013, the stock ultimately broke through a resistance level. "We settle[d] into a nice bullish flag which is a continuation pattern," says Ross. "That tells us the move going into the pattern should approximate the move coming out."
That's what Ross believes happened with the latest break above $200.
"Here we are pushing out to a fresh new high," says Ross. "I think there's at least another $20 upside here in Tesla. I like the chart."
To see the rest of the discussion on Tesla with Stephenson on the fundamentals and Ross on the technicals, watch the video above.
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- John Stephenson