a bad day for Tesla (TSLA) shares

First, let’s put yesterday’s negative price action for TSLA–down by 7%+–in context.  Prior to yesterday, the stock had risen by 75%+ since the opening bell in January.  So a down day–or even a down few weeks–shouldn’t come as a shock.

What happened yesterday:

–TSLA reported 2Q17 results.  Profits were hurt by another production foulup–a shortage of batteries this time–that prevented the company from churning out cars at a higher rate.  The good news is that the problem was solved intra-quarter and shouldn’t affect results for the second half

–TSLA also said it intends to be churning out 20,000 Model 3s a month by the end of the year and 500,000 in total during 2018

–two negative analyst reports were released, arguing that TSLA is substantially overvalued.  Reasons:  plateauing demand for older models, increasing competition from other auto companies and TSLA’s less-than-perfect production experience.  Goldman Sachs says it now thinks the stock is worth $180 a share (down from $190 previously)

–Volvo announced it intends to become a exclusively a hybrid/electric car company in 2019; Baidu announced it will give its autonomous-driving car technology away for free in return for usage data.  Takers include a bunch of other Chinese carmakers + Ford and Daimler

my take

–I sold my last shares of TSLA at $260, based on the idea that this is the highest price I can reasonably conceive of TSLA trading at during 2018, assuming the company does indeed make and sell 500,000 cars.  I guess that’s my bottom line

–the negative reports are good news in the limited sense that they imply the authors’ firms see no possibility of future investment banking business from TSLA.  Maybe their negative analyst stance in the past has already ruled them out.  But emphatically underlining the fact suggests to me they think TSLA needs no further funding to carry out its production plans

–the possible turn to significant profits being earned in 2018 is a mixed blessing.  On the one hand, say, $5 a share in earnings for the company, with the promise of more to come in 2019 is better than the current situation.  On the other, the emergence of earnings–and of a more easily predictable future–means an end to the “dream” of unparalleled riches that many early-stage-company investors routinely harbor with any of their stocks.  For a certain percentage of “dream” stocks, the minute the earnings begin to arrive marks the peak in the stock price.  A minerals exploration company that owns a single orebody peaking the day the mine opens is the stock example.  Euro Disneyland is another.

3Q2016 earnings for Tesla (TSLA): still a “dream” stock

TSLA reported 3Q16 results yesterday after the New York close. The numbers were better than admittedly modest expectations:  the company sold a record number of cars: it had profits; cash flow was strongly positive–although flattered by better management of working capital and sale of pollution tax credits.  Still, a plus.  And the stock is up by about 4% in pre-market trading as I’m writing this.  (I should mention that other members of my family and I hold small positions in TSLA.)

The fact that a $30+ billion market cap company earned $22 million in a quarter would scarcely be considered good news under most circumstances.  Annualizing and rounding up to $100 million for a full year would imply a PE of 300x for the company’s stock!  However, TSLA is still to a considerable degree a “dream” or “concept” stock.

 

The prototypcial “dream” stock is a firm that starts up with the intention of prospecting for gold.  It makes what it thinks/says is a significant strike.  While the company creates the mine and associated processing facilities, speculation about the quality and extent of the orebody runs rampant.  After all, there’s no factual information to contradict any rumors that may float about.

Then the mine opens.  There are now facts available about ore quality and mining costs.  So there’s no more dream–only brass-tacks reality.  The stock typically peaks the day the mine opens.

TSLA’s case is an unusual one.  Auto production has been under way for some time.  Yet the stock hasn’t reverted to trading on actual results.  To some degree the dream has been dented–I find it hard to imagine TSLA could repeat today its 2014 convertible bond offering, whose conversion price was set at $350.  But Elon Musk has expanded and reset his aspirations for TSLA  often enough during its short life as a public company that at least some version of the dream remains alive.  Unless/until TSLA disappoints severely in its results, I’d think the stock will continue to trade without a strong connection to earnings for some time to come.