TSLA – Tesla Saga Won’t Have a Happy Ending

by James Brumley | November 21, 2013 9:37 am

If we didn’t know it to be true, the Tesla Motors (TSLA[1]) saga that has taken shape over the past year or so almost reads like a movie script:

Overcoming many doubters, Tesla CEO Elon Musk successfully launched a zero-emissions electric vehicle that performed as well as a traditional combustion vehicle, and the TSLA automobile didn’t cost an arm and a leg to own. Shares of the company were up as much as 470% at one point this year, driven by sales of more than 19,000 of Tesla’s Model S electric vehicle in just a few quarters. The success not only vindicated Musk, but rewarded investors who believed in Tesla all along.

It was, in literary terms, a textbook example of a story’s exposition … the proverbial beginning of a tale.

The next part of any good fiction plot line is the so-called complication, and right on cue, a few too many fires under the hoods of the Model S vehicle (and the subsequent government investigation) has provided plenty of complication for the TSLA tale.

Tesla stock has plunged 34% in less than two months, and the very idea of a high-powered EV is being called into question.

Unlike most Hollywood-scripted stories, however, Tesla might not ultimately be headed for a happy ending, even though we may see a glimmer of hope in the near future.

What’s Next for TSLA?

First and foremost, any current or prospective shareholders need to understand there’s something of a disconnect between Tesla stock and the company’s value right now. No big deal — it happens all the time, actually.

But, if you’re not aware of it happening, it’s easy to get led into an errant assumption. See, the emotions and opinions driving the stock’s price right now (1) can be fabricated, and (2) can stop and turn on a dime.

With that warning in place, TSLA shares are apt to find a near-term bottom and hint at a reversal right around $111. That’s a near-perfect 50% retracement of this year’s big rally from the stock, and it’s where Tesla stock will encounter the all-important 200-day moving average (green). Point being, don’t be surprised if it looks like the buyers are wading back into the waters there.

Just don’t count on that bounce rekindling the red-hot trend we witnessed over the course of the first three quarters of 2013.

Chart made using TradeStation

Brace yourself if you’re a fan or shareholder: Tesla’s best days are behind it.

That’s not to say the company or Tesla stock won’t have good days in the future, but the Tesla-mania bubble has popped, and like any other bubble, this one can’t be repaired.

Brewing Pressure on TSLA

The great part about story stocks is that their rallies are self-perpetuating. The higher they move, the more prevalent the story becomes, drawing in new buyers, pushing the stock even higher, making the story even bigger, etc.

It’s all great fun as long as the music keeps playing, but once the music stops and investors start to scramble for a seat, the selloff can be just as rapid as the rise was.

That’s largely what’s happening with TSLA right now. Nobody wants to be left holding the bag, and the deeper the selloff cuts, the more likely shareholders are willing to dump it while there’s still some profit left to be locked down (Tesla stock still is up 220% for the year), exacerbating the selling effort.

It’s true for retail shareholders, but it’s equally true for hedge fund and mutual fund managers who are heading into the end of the year with an eye on a nice year-end bonus. To bank those bonuses, though, many of them need to lock in their gains by selling their TSLA positions. And with a little more than two-thirds of the stock’s float still held by institutions, that’s a ton of potential selling pressure for TSLA shares just waiting to be unleashed over the next month-and-a-half.

As for the company itself … that might be the most troubling part of the story.

Tesla Under Fire After Cars Catch on Fire

It’s not that Tesla Motors hasn’t found success. Indeed, it has sold thousands of cars, and has done so pretty consistently for months. Tesla has not actually grown revenue to any meaningful degree, however, since the Model S went into full-production and full-sales mode in Q1 of this year. In fact, Tesla’s top line has fallen from $561 million then to $431 million last quarter.

That’s still respectable, but if that’s where revenue is stagnating — or perhaps even peaking — there’s just not a lot to look forward to. Never mind the fact that Tesla isn’t turning a profit at its current revenue levels.

The rumored lower-cost Model E[2] and/or the upcoming Model X SUV/crossover vehicle [3]could help on the cost-control front, which would be a big step toward profitability. One has to wonder, however, if anyone who actually wanted a Tesla-made vehicle already has one.

For that matter, an investor should rightfully wonder whether the introduction of new models will at least partially cannibalize sales of previously launched models of Tesla’s electric vehicles.

More than that, would-be buyers need to accept the fact that a bet on Tesla from here is no longer just a bet on Tesla — it’s also a bet on the viability of electric vehicles altogether. Elon Musk has continued to paint an encouraging picture on that front, but after three fires [4]related to a unique piece of equipment that makes an electric vehicle work (the battery), the EV movement has undeniably been given a black eye.

In the meantime, the lack of recharging stations that would be necessary to make the lower-cost family sedan marketable is starting to become an oft-discussed drawback.

Bottom Line

None of those challenges are inherently company-killers, mind you. But, like so many dot-coms from the late 1990s, like too many Chinese stocks between 2009 and 2011, and like so many social networking stocks between 2011 and now, there was only one real “heyday” built into the Tesla premise.

After the recent smackdown, TSLA is just another stock, and will need to rely on results rather than hype to drive the stock higher … especially with the stock’s trailing price-to-sales ratio of 9. That’s nearly four times the market’s typical price/sales ratio.

Those results aren’t going to be easy to come by, however, and even if sales and margins improve, Tesla stock still is valued at uncomfortable levels.

It might be time to move on to the next big story.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. TSLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSLA
  2. lower-cost Model E: http://www.autoguide.com/auto-news/2013/10/tesla-model-e-tipped-as-name-of-new-entry-level-model.html
  3. Model X SUV/crossover vehicle : http://www.teslamotors.com/modelx
  4. three fires : http://www.nytimes.com/2013/11/20/business/us-safety-agency-opens-inquiry-into-tesla-fires.html?_r=0

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