I wrote this a few months back. I was very wrong..
In some parts of London, you see Tesla cars on every street, they are literally everywhere. BMW, Audi and Mercedes dealers may claim to be relaxed about the new upstart, but they must know that when it comes to styling, practicality, cleverness and panache, the Tesla has the upper-hand right now.
Buyers range from celebrities to politicians and you can even order a Tesla minicab if you require silent, pollution free travel. At the Eurotunnel in Folkestone, owners now have their own charging points outside the terminal entrance. Whilst we queue for petrol, Tesla owners top up their batteries, giving a range of around 350 miles, or close to half way across France. Owners even have dedicated charging points outside Harrods and inside Westfield shopping malls. .
They seat up to 7 people in comfort and have a fantastic 13'' iPad like screen which replaces the old fashioned buttons and switches of other cars. Updates and servicing information is relayed straight to the 'brain' of the car via the internet. That 'brain' means they can drive themselves (when allowed) and some models, when equipped with the largest battery, will accelerate faster than any Maserati, Ferrari or Lamborghini, even the ones that costs £1m. If you only have half an hour to spare between meetings, you can travel 150 miles or so on a quick charge. All very convenient. All very 2017.
Pretty impressive from an understated, sober looking family car, albeit, a very well off family as the cars start at around £75,000.
What about the shares you ask?
All this means that Tesla stock is expensive. Really, really expensive. It trades at $220 a share today, up from $20 in 2010. The banks and brokers covering Tesla are mostly very enthusiastic and positive, but no surprises there.
The stock was upgraded a few days ago and given a $300 target price, but some of the reputation covering that came with the recommendation was rather desperate, even by the standards of investment banks. Try this one, 'interim swings could take it from point A, down to point B, but ultimately we predict a much higher point C'. They also point out that the stock is 'controversial, expensive and risky'. Reading some of these reports, you could be forgiven for questioning why the author bothered in the first place.
Anyone who has sat in, driven, or been driven in a Tesla product will almost certainly be hugely impressed. The way the car silently surges past other traffic will know that this product is a definite glimpse of the future. The branding, build quality and showrooms are all beautifully executed and styled. However, the market is rating the shares so highly, I can't help but wonder if it has ignored all sense of risk.
Tesla racked up $4.2bn in sales over the past year, and lost $1bn during the same period. It has not made a profit as yet. Remember, this is a $30bn company. Tesla recently announced a new model, the $35,000 family hatchback, the Model 3. It took around 400,000 pre-orders and a third of these were taken before the car was actually revealed. At $1,000 per car, those deposits add up to $4bn which will help sales hit over $9bn this year. According to Tesla, it is aiming for $32bn of annual revenue by 2019. Most investment banks have Tesla making around $10 per share in 2018 and $17 per share by 2019.
Let's say that the investment banks are correct, yes we know that is a huge assumption and one we would not normally recommend, but let's go with it for now. It means that at today's share price of $220, Tesla stock costs 22 times what it will earn two years from now. Let's assume the analyst is also right about earnings in 2019 climbing from $10 to $17 a share, most traders would agree that 70% annual growth is worth paying 22 times earnings for. If you think the banks are correct, you would buy Tesla stock, no questions. Of course, you are banking on correctly predicting that this stock will turn from a loss maker to a huge profit maker within a couple of years and it's the speed of this turnaround that gives us cause for concern. 2 years is not long to go from perennial loss maker to huge generator of profits, and the world may not be buying shiny new cars in 2019 if the doom-mongers are correct and we slip into heavy recession.
Bear in mind that Ford is selling at just 6 times earnings and General Motors is selling at 5 times earnings - those are actual earnings and have already been generated. Of course, neither of these traditional carmakers are as trendy or plain exciting as Tesla, and neither are projected to grow as fast as the electric-auto pioneer. But, both Ford and GM boast double digit projected growth rates and are earning profits right now. Those profits are being channelled into electric vehicle development.
Some of those 400,000 depositors will choose not to complete their purchases, some won't be able to due to 'changes in circumstance'. A deposit should not be considered booked revenue as it takes a much larger leap of faith to commit to $35,000 (plus options) for a new car than it does to put $1,000 on your credit card to reserve one. Tesla stock is priced as if there is nothing that can go wrong in the next 24 months, so whilst the cars and company are certainly inspirational, the shares may be a touch too high, too soon.
Then I drove one..
Last night, a very generous and kind friend let me drive his new Tesla P100D. It was like no other car I've ever been in. I have owned all the traditional supercars and none of them could get close to this thing. It was truly epic, and beautifully built. It's the fastest car you can buy, so maybe the price of entry is not so greedy after all. If you own a £2m LaFerrari, any Lamborghini, McLaren or Bugatti - the P100D packs a bigger punch. Under full acceleration, you feel your organs being compressed and frankly, a bit sick.
Drive one and try not to be smitten. The shares are trading at $300 today, but I can see why. The car is monumental.
James Sanders is a London based trader and investor. He founded the UK’s largest independent derivatives broker in 2001 and left the City in 2009.