Tesla's New Battery Contract Won't Jump-Start the Stock (Correct)

TheStreet.com

(Corrects a report from Oct. 31 that incorrectly stated how many new vehicles were sold in the U.S. last year and Tesla's market share.)

NEW YORK (TheStreet) --Tesla Motors continues its production growth in high gear. Sales of the all-electric vehicles are selling as fast as they come off the production line. According to the company, sales would be even higher if it wasn't for part suppliers creating a sales speed bump from lack of part production capability.

Tesla is working feverishly to source enough components to reach its goal of doubling production by the end of next year. This includes batteries produced by Panasonic, which all electric vehicles need to power their hungry motors.

The current two-year-old contract calls for Panasonic to provide enough batteries to power about 80,000 vehicles over the course of four years. For a company expected to exceed 21,000 vehicle deliveries this year and a desire to drive past 40,000, the current battery contract wasn't nearly enough.

On Wednesday, the companies announced an agreement to raise the number of battery cells to nearly two billion. Current production uses about 6,000 to 8,000 cells per vehicle, resulting in a capacity of, give or take, about 300,000 vehicles. The Street's Chris Ciaccia describes the latest agreement between Panasonic and the California automaker that initially sent shares of Tesla higher.

It sounds impressive at the surface level, but there's a reason why shares of General Motors , Ford and Toyota Motors made a collective yawn while shares in Tesla quickly gave back gains. An increase to only 100,000 vehicles represents relatively poor performance in relation to the stock's appreciation.

Keep in mind that I'm not suggesting the company isn't growing rapidly; if it can sell 100,000 vehicles in 2014, I will be impressed, as will many others. However, I'm not writing about how cool I think the car is or if it will outsell the Mercedes-Benz S Class. The only concern I have is if the environment supports the share price appreciating or depreciating.

In the best-case currently visible scenario, even with full production goals met the shares still don't even come close to justifying a price above $125 a share in 2013. In fact, I think everything above $100 is an easy short.

In 2012, about 14 million new vehicles were sold in the U.S., including passenger cars and light trucks. Using 2012's numbers as a guideline for 2014, if Tesla sells 40,000 cars in the U.S., that's less than a 0.3% market share. Moreover, each vehicle sold for Tesla represents less profit than for GM, Ford or Toyota.

By less profit what I actually mean is that, operationally, Tesla has yet to report a full year of profits. Remove the California zero carbon credits (which most states don't have) and the numbers become even bleaker. But let's move past the "what ifs" with tax credits and just examine the reality of operations and current profitability.

In order to best understand what investors can reasonably expect the market to price a more mature Tesla, we can examine Ford and General Motors. Ford has a forward P/E ratio of 9.5 and GM is even lower at 8. While a foreign company isn't a totally apples-to-apples comparison, Toyota shares trade at an earnings multiple of 10, or similar to Ford and General Motors.

Tesla, on the other hand, currently trades at a forward P/E of 90. If Tesla was a mature company and trading at Ford's or GM's earnings multiple, the shares would trade for about $16 a share versus Wednesday's closing price of $159.22.

But Tesla isn't a mature company; it's a quickly growing company, so it rightfully deserves a richer premium, right? Well, maybe.

Keep in mind that the federal plug-in electric drive vehicle car tax credit that helps subsidize vehicles is limited at 200,000 per manufacturer. As soon as the 200,000th vehicle is subsidized, the effective sticker price of Tesla vehicles increases about 10%.

The buyer discount/tax credit relative impact on price will probably inch higher when Tesla introduces lower-cost models. In other words, if Tesla is able to increase production capability quickly, the effective price for the vehicles will rise dramatically, and sooner than otherwise. If they don't, then potential profit (again relative to the current stock price) is hobbled.

There is no other way to word it than to say Tesla stock is a bubble that, absent an incredibly wonderful event like cold-fusion for cars being invented by Elon Musk (yeah, it could happen, but I like my odds on the lotto better), will crush a lot of believers who don't understand the difference between the price of stock and the value of a company.

I know not everyone will take my cautionary tale to heart, and for those who question my pessimistic outlook I have a simple exercise that may help illustrate the Tesla landscape.

Place Tesla in your charting software and set the interval to monthly.

Next, find one other stock in the history of the markets that shares a similar pattern that ended well. You aren't likely to find any, but for fun you can take a look at Yahoo! in 1998, Molycorp in 2010, Crocs in 2007, Apollo Group in 2004 and many more.

At the time of publication, Weinstein had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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