Tesla Motors Inc (TSLA) suffered one of its customary selloffs in Tesla stock Wednesday after founder Elon Musk said TSLA wouldn’t be profitable until the end of the decade.
Why is this even a thing?
Tesla stock is about as hot a momentum stock as you can find, so it’s not like it trades on anything resembling near-to-medium-term profits, anyway. It’s more about hope and hype. After all, even after the latest selloff, Tesla stock trades for almost 70 times forward earnings.
Furthermore, Musk said TSLA wouldn’t be profitable until 2020 on a GAAP basis. Yes, generally accepted accounting principles paint the truest picture of a company’s income statement, but since when does the market or Wall Street care about that? Stocks trade on — and are valued against — analysts’ non-GAAP estimates. The Street always strips out things like costs for executive compensation, one-time items and special charges. The market cares about adjusted earnings — not GAAP earnings.
And yet it still spooked the market that Musk moved the goal posts. Fair enough: The longer TSLA takes to make a profit, the more overpriced and risky Tesla stock becomes.
Adding to the pain Wednesday, TSLA said sales in China hit a wall last year, starting out strong and then all but disappearing in the fourth quarter. Musk said it was due to a misperception among potential Chinese customers on the difficulty of charging the cars, and the company moved to fix the situation.
Tesla Stock Always Too Pricey
But getting back to the subject of profitability — or lack thereof — makes this selloff looks to be very much overdone. If you really believe in Tesla Motors and are in Tesla stock for the long run, you’re signing up for a ride that’s going to extend well beyond 2020.
That’s why there’s a market for TSLA stock at 70 times forward earnings. No one was betting on this company — a car company — to become a fountain of profitability (on a GAAP basis, no less) any time soon.
Besides, it’s not like a stock needs profits behind it to produce insanely good returns. Just look at Amazon.com (AMZN). It’s barely profitable — and sometimes even takes a surprise loss — yet the market has been giving AMZN stock the benefit of the doubt since day one.
At any rate, the key to Telsa achieving profitability, Musk says, is the Model 3, which will sell for $35,000 when it debuts in 2017. If that car is the hit TSLA expects, it will take about three years to ramp up the manufacturing capacity to meet demand, at which point Tesla would become profitable by GAAP measures.
Musk admittedly has a problem of overpromising and underdelivering, so as much as this latest example isn’t surprising, it does undermines his credibility, as well as that of Tesla Motors.
But why should any of this suddenly matter to TSLA? Tesla stock was overpriced before the latest drop and it’s still overpriced at current levels. Even with its crazy high long-term compound growth forecast, Tesla stock still is pushing it.
We’ll say it again: If you own TSLA stock at current levels, you’re going to have to hang on through some years of serious volatility before it really pays off. The end-of-decade mark is effectively irrelevant.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
