Tesla Motors: Does It Deserve Its Triple Digit Share Price?

looks like a stock straight out of the tech boom in the late 90’s. It looks like a perfect hockey stick pattern with the ascent beginning in April and spiking to $110 a share just this week. See for yourself below.

I have a hard time seeing that this new increase in share price is somehow justified. The price target on the shares is $74 which is 29% below where the shares are at. The company is expected to break even in 2013 and earn 98 cents a share for a forward P/E ratio of 107. We don’t have to look too far back to see what happens when a stock is carrying an unsustainable earnings multiple by looking back at Facebook’s (FB) well-publicized IPO.

Yes, Facebook fell 50% in the first 6 months after the IPO. Does a similar future await Tesla Motors? I think yes although this may occur not tomorrow or even next month but over the course of a year. It is clear that this valuation is unsustainable and the excitement generated by the market over the past 3 weeks surrounds the company’s recent announcements, which have had little to do with the demand trends for the company’s products and more to do with the back office stuff. Here is a rundown:

On May 15, the company announced a convertible note and stock offering. The offering consisted of 2,703,027 shares of common stock and $450 million aggregate principal amount of convertible senior notes due 2018 in concurrent underwritten registered public offerings. In addition, Tesla has granted the underwriters a 30-day option to purchase up to an additional 405,454 shares of common stock and $67.5 million in aggregate principal amount of the notes.

On a side note, management did step up to the plate. Tesla also said Elon Musk, Tesla's chief executive officer and cofounder, intends to purchase shares of common stock at the same public offering price for an aggregate purchase price of $100 million. Of this amount, approximately $45 million would be purchased in the common stock offering, and approximately $55 million would be purchased directly from Tesla in a subsequent private placement due to the waiting period requirements of the Hart-Scott-Rodino Act.

The stock jumped 9% on the news of the dilution. Yes, you read that correctly. That does say dilution. On May 22, Tesla announced that it repaid a loan. Tesla said that it paid off the entire loan awarded to the company by the Department of Energy in 2010. In addition to payments made in 2012 and Q1 2013, today's wire of almost half a billion dollars ($451.8 million) repays the full loan facility with interest. Following this payment, Tesla will be the only American car company to have fully repaid the government. The stock rose another 6%. And slowly but surely the shares climbed over $100 and now trade at just under $105.

For further convincing that the shares are trading above what any sober investing professional would value them at, look at the details of the offering. Goldman Sachs was the sole book-running manager for the offering of common stock. Goldman Sachs is arguably the best investment bank around with a great reputation for being one of the best stock pushers on the planet. Goldman Sachs was also involved in Facebook’s IPO and was later sued over its actions.