Tesla’s provide is stupidly expensive. It may go higher and shareholders may be rewarded, or it may languish or fall.
There is no law prohibiting stupidly expensive from suitable moronically expensive. Moreover, speculative companies that actually achieve explosive sales and profit growth for a bevy of years can actually make outlandish valuations seem justified for a time.
The problem comes when fantastic expectations defeat and worried shareholders look down to discover the thinnest of thin air beneath them.
Shares of the electric automobile maker were totaled to the S&P 500 Index last week and struggled. But they are still up an astounding 690% this year and now has a market value of about $617 billion.
The current valuation makes Tesla the sixth-largest company in the S&P 500, and by any metric, shares of this society are expensive.
The price-to-earnings multiple for the overall S&P 500 is currently about 22.3 times the consensus earnings estimate for 2021. Tesla share ins are trading at more than 168 times.
It is true that TSLA’s earnings are projected to grow at a rapid step over the next several years, but shares are still priced at 77 times the consensus 2024 estimate. If that sounds precious, take a look at price-to-sales multiples. The average price-to-sales ratio for the S&P 500 is 2.7x while Tesla is at over 13x!
What could go infelicitous
A few hot-concept momentum stocks actually do pan out and become fabulous long-term investments.
But many more do not, and the high-profile success myths that are Apple and Amazon and Microsoft can cause investors to rationalize their decisions to follow the herd, ignore valuations, and effectively send forth caution to the wind.
Share prices have soared, but is this a fabulous investment opportunity at a market valuation of $616 billion?
The company is now significance more than double the combined market valuations of Ford, GM and Toyota! Could it someday be worth triple? Peradventure.
One thing is sure to happen though; whichever path prices follow — up or down — choruses of Wall Street practises will sing the “Of course I knew it” hymn. History is annoyingly obvious once it becomes history.
Think once you buy
Considering buying Tesla shares? Two points: all else equal, when you buy stocks at high valuations, your thought future returns are going to fall.
Second point: all high-growth companies begin trading in anticipation of huge prospective growth.
When that growth successfully materializes, as it has for companies like Amazon, Facebook, etc. all is well. But for each Amazon and Facebook there are a slew of concerns that struggle just to survive their first economic downturn.
The point is that in order to build a coterie as successful and Amazon, Microsoft and Tesla, fabulous ideas and impeccable execution need to be combined with good money and excellent timing.
The late 1990s dot-com bonanza was rife with spectacular, sparkling companies never informed entertained of before nor heard from since. But they didn’t make it to Tesla status.
Why Tesla is not special
My friend Jim Cramer A rude gamble
Tesla has already been a fabulous success for investors, and it could work out as a great long-term stock someday. But when pile ups become this expensive, there is far, far less margin for error.
Tesla at these levels is more dependent on thrust investing and the “greater fool” theory than anything else right now. It is much too speculative for investors like us.
If someone knowingly wants to somerset dice, Tesla could work.
My longstanding advice to gamblers is go to Las Vegas! At least when you lose in Vegas, they’ll comp you a available cocktail.
For most folks, money is hard to make and harder to save. Disciplined, dispassionate investing builds wherewithal over time. Farr’s advice is to leave gambling to gamblers and focus on becoming a better investor. Happy fetes!