Are Tesla shares overvalued? If you ask Daimler, investors have gotten ahead of themselves with their exuberant love for Elon Musk’s California-based manufacturer of sporty electric cars.
On Tuesday, Daimler decided to cash out on its 4 percent stake for the price of $780 million in cash (615 million euros). Not a bad haul considering the company paid almost $50 million for the stake in May 2009.
The gain was already largely reflected in Daimler’s second-quarter income statement, however, when they wrote up the value of their stake after reclassifying it to “available for sale” following the loss of their boardroom influence in June. The sale will hence only trigger a substantial cash inflow.
Just as important, Daimler limited its future risks by terminating the combination of put and call options purchased and sold, respectively, that were in place since the fourth quarter of last year to hedge against a drop in their capital gains. These derivatives that are marked to market became more expensive to maintain as the value of the shares continued to rise, triggering losses of 230 million euros in the first half. Further charges could continue as long as the hedging position wasn’t closed. Fortunately for Daimler, this might not be material in the third quarter, however, since shares barely over the course of the three months.
Tesla shares have soared ever since its $17-per-share initial public offering in June 2010, rising a recent high of $291. The stock has come down somewhat after oil prices - a proxy for gasoline costs - went into a bear market, discouraging the purchase of electric cars. The Fed is also due to end its monthly asset purchasing program this month, known as QE, which has heavily supported equity prices.
Nevertheless, Tesla still trades at 11.9 times sales at its current market cap of $29 billion versus just 0.5 times for Daimler, according to Bloomberg data. This is astonishing for a company expected to deliver only around 35,000 Model S cars this year and which generates a quarter of its revenue from the Norwegian car market.
Normal Price-Earnings ratios are impossible since the company lost over $100 million on a GAAP basis in the first half. Upcoming risks both on the upside and downside include whether it can count on success for its Model X crossover due to go into production in spring of next year as well as its Model 3, an electric car for the masses, for which it is plans to invest $2 billion through 2020 in a new Gigafactory for batteries.
Daimler CEO Dieter Zetsche may have given a tiny hint in Paris earlier this month of what was to come. When asked by reporters whether Daimler might consider raising its stake in Tesla, he almost had to stifle a laugh before explaining that “this would be a very costly endeavor and I don’t foresee that.”
When pressed then as to whether that meant the shares were priced too high when compared to their underlying fundamentals in his opinion, a diplomatic Zetsche replied: “The financial market has made its judgment, so who am I to come to a better conclusion?” He did the moment he sold.