Investing

Tesla’s Stock Rises 457%, Should You Buy Some Now?

By Kanwal Sarai
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TeslaOn June 29, 2010 Tesla went public and issued shares with a starting price of $17 each. Today the share price is $94.84 which represents an increase of over 457%! Should you buy shares in Tesla? Before I answer that question, I'll have to answer two other questions first:

  • What is Tesla?
  • Why has the stock price gone up so much recently?

Then I will move on the final question:

Should you buy shares in Tesla right now?

What is Tesla?

Tesla Motors, designs, develops, manufactures, and sells electric vehicles and electric vehicle powertrain components. The company also provides services for the development of electric powertrain systems and components, and sells electric powertrain components to other automotive manufacturers. It markets and sells its vehicles through Tesla stores, as well as over the Internet. As of March 31, 2013, the company operated a network of 32 stores in North America, Europe, and Asia. Tesla Motors, Inc. was founded in 2003 and is headquartered in Palo Alto, California.*

Why has the stock price gone up so much recently?

Tesla has had some fantastic news recently:

  • Csaba Csere from Car and Driver magazine gave the Tesla Model S a glowing review
  • Consumer Reports gave the Model S a near perfect score of 99/100
  • Tesla repaid the Department of Energy loan nine years early
  • Tesla posted their first quarterly profit in their 10-year history

All of this great news led to the stock price going up.

Before I get to the last question, I would like to say that I am a big fan of Tesla. Everything I’ve read about the Model S leads me to believe that this car could be the next generation of zero emission vehicles. I wish Tesla all the best, and hope that the company continues to be successful. However investing is about evaluating risk without getting emotional about a company or it’s products. Even with all this great news and recent stock price increases, is Tesla a worthy investment today?

Should you buy shares in Tesla right now?

The short answer is “no”. In the Simply Investing Course I teach my students 12 factors to check before buying any stock. For today I’ll look at just 3 factors and see if Tesla is a good investment today:

  1. Is the company consistently profitable? Here I look for companies that have a long-term track record of increasing EPS (Earnings per Share). I normally look for a 10 year solid track record. Tesla became a public company in 2010, and just recently announced their first profit since going public, therefore Telsa does not a long enough track record to show consistent profitability.
  2. Does the company consistently increase their dividends? Tesla does not pay any dividends, therefore it has no track record of increasing dividends.
  3. Does the company have a low P/B ratio? I generally look for companies with a low P/B ratio of less than 5. Tesla’s P/B ratio is 68, which in my opinion is too high.

Let’s see how Tesla ranks in these 3 factors described above:

  1. Is the company consistently profitable? No.
  2. Does the company consistently increase their dividends? No.
  3. Does the company have a low P/B ratio? No.

In addition to these factors, I have another 9 factors that I consider before making an investment. I look to invest in quality companies when they are undervalued. Tesla is currently not undervalued and in my opinion not currently a quality company, therefore even though I like the company I will not be investing in Tesla shares right now.

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*Source: Yahoo Finance, http://finance.yahoo.com/q/pr?s=TSLA

Photo Source: http://www.teslamotors.com/

Kanwal Sarai

With more than 27 years of investing experience and a passion for investing and teaching, I demystify the world of investing. My goal is to help you grow your net worth by investing in quality dividend paying stocks. Build your own stream of increasing income today.

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Showing 2 comments
  • Dividend Tactics
    Reply

    Nice fresh read, I have to admit I though about this too when I heard about their glowing consumer reports review, if only for a moment.

    I think I'd sooner buy the car than their stock – or better yet own the utility companies who produce and distribute electricity that this car needs….and collect some nice dividends along the way

    Cheers,
    Michael

  • Kanwal Sarai
    Reply

    Well said Michael! Utilities companies with a long history of paying dividends are worth considering.

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