A market capitalization of around $20 billion, and a share price that has more than quadrupled, has led many analysts to pin the "overvalued" label on Tesla. They criticize its lack of significant earnings, atop a valuation far richer than that of other automakers. But is Tesla really overvalued when compared with the other high-growth companies Wall Street likes?
What Wall Street likes
Wall Street sees -- and adores -- growth in businesses that shake up an industry and challenge existing paradigms, and in new technologies that could make existing ones obsolete, or at least steal much of their market share.
Tesla fits the bill in both areas. Its Apple-esque mall stores, direct sales, and build-to-order systems represent a stark contrast to large franchised dealer lots bloated with unsold inventory that's rapidly depreciating in value.
The technology side is pretty clear as well. We won't spend the entire article on the features of the Model S, but its top features include the longest range of any all-electric production car, among the best-ever crash-test ratings, SUV-sized cargo space, an ultra-low operating cost, and, of course, top-notch performance.
So Tesla has the technology and industry-changing business model that Wall Street loves, and commands a high valuation because of it. Another company with both of these characteristics is Amazon.com , with an online sales model that has won Wall Street's approval. \
Investors show that approval in the form of dollars, and Amazon.com shares have surged, even though the company isn't posting significant earnings. Not only does Wall Street give Amazon.com a high valuation, but that valuation (based on fiscal 2013 and 2014 P/E ratios) is even higher than that of Tesla.
Just as Wall Street expects Tesla to ramp up Model S and Model X production and proceed into the mass market, the Street predicts that Amazon.com will move into other areas of online commerce. Lately, Amazon.com's Prime offering has been getting a lot of attention, growing beyond free two-day shipping and occasional product offers into things like online video streaming.
AmazonFresh, the online retailer's grocery business, has also been in the news. It's busy building refrigerated warehouses to compete with grocery chains.
There are many other examples out there. Netflix commands a triple-digit P/E ratio based on fiscal 2013 earnings, and a forward P/E ratio of 90 for 2014. Netflix and Amazon.com are both using the technology of the Internet to disrupt traditional business models. In Amazon.com's case, the victims are big-box retail stores, and in Netflix's case, the losers are video rental companies.
Both companies are also seeking to maximize their potential through new services. We have already discussed Amazon.com's expanding grocery business and online streaming, but Netflix has begun to take on major cable providers' network programming. With shows like House of Cards and Orange Is the New Black, Netflix is developing its own exclusive content, and customers (or potential customers) who want to see them will have to subscribe.
The thing all of these companies have in common is a combination of business-model innovation and technological changes. New initiatives, whether they be in online groceries, original programming, or increased auto production with new models, have convinced Wall Street that major growth is happening. Because of this, Wall Street is willing to generously price these companies for this amazing growth and maintain these valuations over time.
Wall Street dollars flock to growth, and Tesla, Amazon, and Netflix are all expected to put out strong growth figures for at least the next few years. When one compares Tesla to companies with similar growth expectations (like the ones listed above), rather than mature automakers unlikely to see such growth in the next decade, Tesla's valuation doesn't look too far out of line.
Investors interested in Tesla -- or any other high-growth company -- as a long-term investment should do their own research and be warned that shares of these types of companies are not for the faint of heart. Wherever their shares are going, it's sure to be a wild ride.
The article Does Tesla Need To Be "Fairly" Valued? originally appeared on Fool.com.
Alexander MacLennan owns shares of Tesla Motors. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Amazon.com and Tesla Motors. The Motley Fool owns shares of Amazon.com and 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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