Investing in any stock is risky. Investing in an emerging automotive manufacturer is even riskier. As a triple threat, Tesla is currently experiencing battery fires and the backlash from them.
Tesla Motors Inc is trading at $175.3 today (1-30-14). That is a drop from $196.60 on December 31, 2013. Still, that is quite an increase from its IPO of $35 a share. That sounds like a good investment and would be if you had bought early and plan to sell now. In fact, doing just that has made some people rich. There a lot of hype that the stock could go even higher, perhaps breaking the $200 barrier. So should you buy?
Why Wait to Buy Tesla Stock
If you are thinking of buying Tesla as a long term investment, you may want to wait. Long term investments generally have two things in common…long term existence and stability. Tesla is still a babe-in-the-arms and many professional investment advisers do not think the company can hold its current price for long. Merrill Lynch thinks that Tesla has a true value of around $45. The company has written:
”We continue to view Tesla shares as vastly overvalued and maintain our $45 PO, which is based on a 2015e EV/EBITDA multiple of about 12X. We note that our valuation multiple is relatively consistent with the simple average of 2015 EV/EBITDA multiples for a group of 35 growth oriented tech companies, based on consensus estimates.”
Many of the investors currently buying into Tesla are betting heavily on the success of electric cars and the inability of the larger manufacturers to adapt to that market. They are also betting that people will continue to line up to buy an electric car that averages $80,000+ when nearly every other manufacturer is offering a less expensive option, and EV prices overall have come down 40% in the last decade. Sure the Tesla Model S is currently the most popular car among the West Coast uber-rich, but the American 1% is just that–a very small percentage of the overall population.
Whether Tesla Motors is a good investment or not comes down to your ability to tolerate risk. The company has a significant risk to correct downward.
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