Earnings season is in full swing now and while the numbers are a little better than I was steeled to see, many of the reports still leave a lot to be desired. Let’s start with Tesla Inc. (NASDAQ:TSLA).
People on Wall Street are cheering the fact that Elon Musk once again managed to swing the company to a profit after burning $500 million over the previous two quarters. At this rate, he might end the year roughly where he started.
That’s not the kind of business that usually earns a 1.8X sales valuation on the stock. And while Musk’s production mix has finally pivoted from luxury electric sedans to the mass-market Model 3, it’s hard to ignore the fact that Tesla’s revenue actually went down $500 million from last year.
Tesla isn’t even growing the top line quarter to quarter. If you’re evaluating this company according to sales, the stock should be pointed down.
Giant Stock, Tiny Company
I say more about this in my radio show, but I want to give you a preview here. I love Tesla cars; I just don’t see the appeal of the company or the stock.
Musk fans often say Tesla is one of the biggest disruptors on the planet and that it is eating the lunch of every established car company within charging range. I admit, it takes a brilliant imagination to engineer these vehicles and build a $25 billion market around them.
But even though General Motors Co. (NYSE:GM) is having a tough year, demand for GM cars is actually holding up better than what we’re seeing from Tesla. Weighing the two product lines, Tesla revenue is down 7 percent while GM is 6 percent below last year’s level.
And GM is still a behemoth with a commercial footprint six times bigger than its all-electric rival. While that top line isn’t rising, we can make the exact same case against Tesla.
Both companies had a rough quarter. The trade war has stung and with GM, labor tensions have boiled over. Neither stock is a prize right now.
Compared to Tesla, GM looks grossly undervalued. With nearly identical sales growth curves, is there any reason Tesla deserves a premium price?
Remember, GM is a profit machine that pays a 4 percent yield. Tesla has only made money so far when Musk cuts his way to positive margins. If sales are shrinking, you need to keep cutting to sustain profitability.
If you stripped the Tesla brand and Musk’s cult of personality from the stock and scrubbed all long-term hopes and fantasies from the revenue models, TSLA and GM should support a similar valuation right now.
They both make cars. They sell as many as they can as profitably as management can engineer. One car may be fancy and the other is an American classic, but cash flow has no taste. It’s all about the dollars.
On that basis, either TSLA should trade around $50 or GM should be a $180 stock. Is one too cheap or is the other too expensive relative to its peers?
But it’s a trader’s market. Click here now to watch my presentation about how you can profit when Wall Street turns choppy.