Tesla Is Overvalued -- But You Shouldn't Sell

Tesla Is Overvalued -- But You Shouldn't Sell

A rise in Tesla Motors' stock price now seems almost like an expected daily occurrence. Though the company is certainly firing on all cylinders, is this gain getting out of hand? Maybe. But that doesn't mean it's time to sell.

Huge expectations
Tesla plans to sell 21,000 fully electric Model S vehicles this year. Next year, it plans to sell 40,000. Ambitious, right? Not when these plans are viewed in the context of the company's valuation.

In order for Tesla's current valuation to make sense, it will have to reach annual sales of about 500,000 vehicles. According to some conservative estimates, Tesla could earn $880 million per year in operating income at this level. This would put Tesla, at today's market capitalization, at about 23 times operating income -- still expensive, but at least reasonable.

Sure, Tesla Motors looks poised for an awesome future. What's more, the company's heavy investment in supercharger stations helps make CEO Elon Musk's huge ambitions seem more realistic. And, most importantly, the management team has proven it can execute.

When it's all said and done, Tesla is the type of company many investors like to hold in their portfolio. But price matters -- and the higher the stock soars, the further we venture into speculative territory. At today's price, the expectations for Tesla are simply enormous.

What should investors do?
If Tesla Motors really is officially in speculative territory, does that mean it's time to sell? Not necessarily.

Investors with a Foolishly long-term time horizon can use time as a tool to help them invest better. Unlike the Street, there's no reason for individual investors to be in a hurry.

Investing with the intention of holding for the long haul allows investors to invest less like traders and more like business owners. It empowers them to be less concerned with the short-term market gyrations that are, for the most part, completely unpredictable. Sure, history tells us that a growth stock with a lofty valuation (like Tesla) will likely have a very volatile ride. But a long-term time horizon allows investors to forget about that and look at the underlying business.

Fundamentally, Tesla Motors is mostly exceeding the Street's expectations. The company's revenue is soaring, and its gross profit margins continue their impressive climb.

With supply limited, Tesla is selling every Model S it can make. As the company expands internationally and ramps up competition, sales should continue to soar.

In other words, Tesla as a business seems to be doing exceptionally well. Sure, investors expect this. But with the company going above and beyond what the Street expected, there's no reason to sell this stock.

Tesla isn't a buy, but it isn't a sell, either. As long as the company continues to deliver exceptional results, I'm in for the long haul.

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The article Tesla Is Overvalued -- But You Shouldn't Sell originally appeared on Fool.com.

Fool contributor Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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