Tesla (TSLA) has been turbocharged in 2013, with shares of TSLA stock up 260% year-to-date.
Recently, Tesla earnings came in ahead of analyst estimates, while the company beat its own expectations by delivering 5,500 Tesla Model S vehicles. However, Wall Street’s expectations were lofty for the momentum stock, as TSLA stock investors wanted to see 6,000 cars sold.
Toss in safety issues with the Tesla Model S, and you have a recipe for weakness in TSLA stock. In fact, shares of Tesla are now 37% off it their highs.
Sure, TSLA still has a lot going for it — including no real competition, a great product and the potential for momentum to once again move in its favor. But even with those tailwinds in mind, your money is better-spent on other stocks besides Tesla.
In fact, here are five reasons why TSLA stock investors should cut and run:
The market will never be large enough. Tesla is fighting an uphill battle against fossil fuel vehicles. Most people could not care less whether they drive a gasoline car, a hybrid or an electric car like the Tesla Model S. The small percentage of “greenies” that care aren’t enough to make a difference. People want a good, reliable car that fits their budget … and the simple truth is that Tesla Model S cars cost a small fortune. The vehicle will never be affordable for the average American, no matter what CEO Elon Musk says about lowering battery costs. Plus, a car remains one of the worst investments you can make. The limited market will act as an anchor on Tesla earnings … which means TSLA stock is never likely to trade on substantive earnings. That’s not the kind of investment you should be looking for.
Supply and demand problems. TSLA stock could also be struck by the company’s supply and demand issues. To start, Tesla is facing cell production problems with Panasonic, its manufacturer. While the two companies just reached an extended battery agreement, TSLA will require even more capacity for its Gen III model. As a result, the company is considering building its own “giga factory.” But that’s a big question mark , with details still being worked out and no guarantee that it would solve the issue. In the meantime, TSLA earnings are showing the effect of failing to sell all the Tesla Model S cars the company is producing. In the last quarter, for example, TSLA management said that production significantly exceeded deliveries, which takes us back to the problem of the Tesla Model S being way too expensive. If you want to own a green vehicle in this economy, you have to pay more than you would for a gas-powered vehicle. Considering that the recovery has been slow, unemployment remains high and a record number of people have left the workforce in the past five years, demand just isn’t going to be there for TSLA.
No free cash flow. Another red flag is the fact that Tesla has been free cash flow negative for years — to the tune of $500 million in 2012 and $150 million in the trailing 12 months. How long will TSLA throw money at a product that can’t generate enough sales volume to create free cash flow? And if Tesla isn’t making a big profit now, how does scaling larger help? Over the long term, this reality seems to weigh heavily against big returns in TSLA stock.
Momentum! Remember, TSLA stock movement has nothing to do with Tesla earnings. Instead, shares of TSLA stock move based solely on macro psychology within the market. Bad news will tank Tesla stock, whereas good news will drive TSLA like a rocket. That means TSLA stock behaves more like a casino. Meanwhile, you can find plenty of other companies that boast great, affordable products, huge markets and obvious growth trajectory.
Valuation. Even a detailed valuation model suggests Tesla stock is way overvalued, despite already have lost some 40% off its high. Meanwhile, standard valuation measures say TSLA is trading at a forward P/E of 81 and a PEG ratio of over 11. And as we said, no matter what kind of growth TSLA sees in the next few years, there is a definitive cap on the size of the market it will capture. That means TSLA stock will not be able to justify this premium.
Bottom Line for TSLA
Momentum is the strongest factor going for Tesla stock, but at the moment the momentum has swung against it. Federal regulators are also reviewing recent Tesla Model S fires — three have been reported — and that could also hurt TSLA stock in the near term.
All in all, I don’t see prices coming down on the company’s cars enough to make them a mass market winner. That means that TSLA stock is, at best, a momentum trading play. Meanwhile, any long-term investors should take a good, hard look at their position.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.