Why You Shouldn't Buy Tesla

I was thinking the past few days about tech stocks and how the scent of a high return can easily sway the market into creating overpriced businesses. Right now, Tesla embodies this. Let me get this out of the way so you understand what I'm saying, I think Tesla is a great company, and they are doing some truly great things.

With that out of the way, I now want to give you a bunch of reasons why you shouldn't buy Tesla and you can think about it on your own and make your own decision. I'm not here to tell you what to do, but I would love to share my rationale as to why a company is overpriced so you can understand what you are buying when you purchase it!

Low earnings yield.

This might sound boring but just bear with me for a second. Right now Tesla trades at a PE of 1145. This means you are buying a dollar or earnings for 1145 dollars. We can get an earnings yield by inverting the PE into Earnings to Price Ratio.

1 / 1145 = .00087 or .087%

This is absolute trash. The earnings yield on government bonds is 1%, which is also trash. But 1% is a larger number than .087% by a long shot. Yes a bond won't go up in price and Tesla probably will, but you're better off looking for a stock that has a better yield than either bonds or Tesla.

Total Available Market

Speaking of how much Tesla can go up...

I have no idea how much it can go up based on the parts of the company. Maybe someone does. However, I do know that the largest company on the S&P 500 is Apple at 2.09 trillion dollars. Apple earns 58 billion dollars, Tesla 566 million (this is the first year they've had profitable income)...

Tesla would need to have its earnings go up 10x to even approach Apple and yet the market cap is already 1/4 of Apple's value. Now I realize these are two different companies, Apple won't keep growing at rates that Tesla has, but neither will Tesla. In order for Tesla to earn the same amount as Apple, their market cap would be around 5.6 trillion, (I'm being lazy on this calculation as it doesn't take into account a host of factors, if I did, this number would be the bare minimum) or the total market cap of the three largest companies in the S&P 500: Apple, Microsoft, and Amazon.

The point is Tesla needs to make an insane amount of money to justify buying it at its current valuation. Apple trades at a PE of 28 by the way... And they pay a dividend, just saying.

But hey, maybe you have a crystal ball, can read the future, and think that Tesla will one day be bigger than the 3 largest companies in US history combined. In that case, you'll make a killing!

But This Time Is Different!

I'm only 34 and haven't lived through many bear markets, but I've done some research on it. Look at the nifty 50 or the tech bubble in 2000. People were saying "tech has changed the market," "tech is here to stay," and all sorts of platitudes. Irrational exuberance at it's finest.

Here is how these bubbles usually go:

Tech goes up in price > people pile money in to try and ride the wave up > valuations get insane (Yahoo Traded at an 11,000 PE) > the market gets pissy about these stocks for a multitude of reasons > the prices fall precipitously > people never invest again.

There is no way of measuring when this will happen, if you could you'd be richer than Warren Buffett. The only certainty is that overpriced stocks will go down at some point, might be next week, next month, or a few years from now. Like I wrote in my last article the market corrects by -13% at very regular intervals. Which equities are going to get beat up the most?

Expensive stocks.

The point is buying Tesla right now is pure speculation. You're buying it because you think someone will pay you more for it at a later time. Some speculators are rich, I'm not one of them. My only suggestion is to try and find good businesses that are trading well below their intrinsic value and buy them, hold them and wait until the market properly evaluates them then re-evaluate.