Tesla Motors (TSLA) made history in 2013. With its performance-award winning Model S, the company has put electric vehicles on the map in a way that even many optimistic observers didn’t foresee for the near future. After an epic upsurge in share price, the company now has a market cap that suggests it is a serious competitor for leadership in the automotive industry going forward. Indeed, few would doubt that it has taken a competitive lead over industry giants General Motors (GM) and Ford (F) in the electric vehicle market. However, many believe that the share price has gotten well ahead of the company’s realistic prospects for the near future.

In our March 2013 article, A Test Drive to Remember, we discussed the possible impact of the Model S on Tesla’s fortunes.  At the time, the company had recently suffered from a scathing review in the New York Times (NYT), which described, in excruciating detail, the travails of reviewer James M. Broder, on his long-distance test drive. The main problem was the unreliability of the car’s estimated range on the battery, and the accessibility of recharging sites along the way, despite Tesla’s new series of fast-charging stations. This brought home the point that Tesla, despite its best efforts, had not defeated the phenomenon of range anxiety, consumer’s fear of electric cars’ traditional inability to make long distance trips. After initially leading to a dip in the stock price and a flurry of cancellations early in 2013, consumers soon proved the critics wrong.

Led by celebrity CEO Elon Musk, the company was set up to create affordable, mass market electric vehicles. While the Model S, with a starting price around $70,000, is not affordable for most consumers, it has shown that an all-electric vehicle can attain commercial success, confounding naysayers who had held that feat to be impossible until battery technology advances dramatically from where it stands today. What critics had missed was that range anxiety, while still a concern for the electric vehicle industry, is not an absolute constraint on its growth. The Model S’s range is more than enough for the vast majority of day to day driving. Furthermore, it is, in the opinion of many observers, the first electric vehicle to beat traditional combustion-engine automobiles in terms of performance, rather than just appealing to environmentally-conscious consumers.

The car turned out to be a smash hit, surpassing the estimates of many optimists. The stock price, which had been stuck in the $30’s as of March, had surged to over $194 by late September, on much stronger than expected sales and excellent performance reviews. Tesla has set a shipping target of 800 cars per week by late 2014, which should help the profitability of the Model S. Furthermore, the company looks set for its first full-year profit in 2014. The Model X crossover utility vehicle is expected to go on sale in late 2014, and its success or lack thereof may show whether Tesla can continue to build on the success of the Model S. The company also plans to come out with a new vehicle that would cost somewhere in the $25,000 to $35,000 range several years down the road, and thus could appeal to a far broader consumer base. Finally, Tesla has begun to cut out traditional auto dealers by opening its own showrooms in many states, and Musk has discussed possible plans to build a superfactory to produce its own lithium ion batteries, which could revolutionize that vital portion of the electric vehicle industry. These ambitious moves have already made Tesla a game changer in the electric-automobile industry, and it will likely continue to shake the auto sector as a whole going forward. 

Previously, a series of fires caused by drivers hitting metal debris led to fears about the safety of Tesla’s technology. The stock has bounced back recently, as the National Highway Traffic Safety Administration reaffirmed its U.S. five star safety rating for the 2014 Model S. Indeed, at the current price, the company’s market cap is over a third of that of General Motors or Ford, despite having only about 1/70th of their sales in 2013. Furthermore, there is considerable uncertainty in terms of the company’s future earnings, which depend on its ability to stay ahead of the curve and continue to produce innovative, high-performance automobiles that will gain even greater appeal than the Model S. 

Indeed, even if the company does succeed in growing its earnings dramatically out to 2016-2018, we foresee trouble for these shares in the long term. With the current stock price being far in excess of our 3- to 5-year projections, we think these shares are currently trading on momentum and lofty hopes rather than proven value. Therefore, we think most investors would be well advised to look elsewhere for now.

 At the time of this article’s writing, the author did not have positions in any of the companies mentioned.