TSLA Stock – Has Tesla Topped Out?

by Jeff Reeves | July 8, 2015 1:57 pm

Tesla Motors (TSLA[1]) continues to prove naysayers wrong, with TSLA stock sitting on a 16% gain year-to-date despite talk of overblown valuations and production bottlenecks.

But lately, the success of Tesla stock has started to show some strain.

TSLA stock is down about 5% in the last few days in part because of a downgrade from Deutsche Bank[2] from “buy” to “hold” on fears that most of the success is baked into shares.

Of course, at the same time, DB raised its target from $245 to $280 and expressed optimism over Tesla’s battery technology. So it wasn’t all bad.

The million-dollar question for traders, then, is whether sentiment is still strong enough to push TSLA stock higher or whether the momentum is waning.

Don’t Sweat Tesla’s Tumble Too Much[3]

Deutsche Bank and others are afraid that the party may be over soon. Consider Pacific Crest, which also downgraded the stock last week on valuation concerns — though it also has a nice upside target of $293[4] still on shares. Also, Merrill lynch has long been panning Tesla stock, and while it recently upped its price target to $180, the “underperform rating” is based on the idea that while Tesla’s cars may be popular, its proprietary technology isn’t as hot as some think.[5]

But I happen to side with the bulls when it comes to TSLA stock. I think both the short- and long-term outlooks for Tesla Motors Inc remain strong, and here’s why:

TSLA Stock Looks Strong

The fact that analysts are downgrading Tesla stock but moving price targets higher is proof positive that nobody knows what the future holds for TSLA. It seems to me that the analysts are trying to hedge their bets and play both sides of the trade, then, instead of actually taking a side.

There are assuredly good reasons to be skeptical of Tesla’s valuation here. TSLA stock has a forward price-to-earnings ratio of about 75, and a price-to-sales ratio that is approaching 10. That’s rich even for a cult momentum stock.

Furthermore, while I don’t think that it’s fair to value Tesla based on its total production and sales volume alone, it’s important to recognize that nice profit margins, strong customer support and a big order backlog are still limited in a serious way by production bottlenecks.

But Elon Musk is indeed a visionary CEO, with big long-term plans that can’t be ignored.

Tesla’s latest filing anticipated that production will only reach 2,000 units per week[6] by year’s end, or just over 100,000 annually. That’s admittedly just about a third of the 300,000-plus Fusion sedans sold last year[7] by Ford (F[8]), but remember that Tesla’s Model S sedan and anticipated Model X SUV are both luxury vehicles with healthy margins — neither are intended to be mass-market vehicles.

It’s also worth noting that TSLA won’t stop there. Its planned Model 3, a more affordable electric vehicle, is expected to launch in 2018, and you can be sure 2015 production plans won’t be the final word.

Beyond cars, too, there is the ambitious Gigafactory[9] to provide fuel cells and batteries to third parties as well as the Powerwall home battery unit[10] that will begin deliveries this summer. Both go far beyond the idea of electric vehicles and address the notion of sustainable energy use in many areas of life — a growth industry where Tesla has intellectual capital, brand cache and a grand vision.

Click to Enlarge Remember, Tesla isn’t a trade to make based on the fundamentals. As Tim Collins over at The Street pointed out in a recent technical analysis[11], the recent drawback in shares is presenting a breakout opportunity based on momentum and sentiment for this fast-moving stock.

Collins sees upside to $280 “minimally — with follow through making even $300 possible.” The support level to watch for is $260, about where shares are resting right now.

So any way you slice it, short-term or long-term, the narrative is pretty powerful behind Tesla.

I think those who overthink the fundamentals are making a mistake here and are underestimating the animal spirits behind TSLA. Buyers should have confidence after this recent pullback… but just expect volatility ahead no matter what in this high-octane cult stock.

Jeff Reeves[12] is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[13] As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com[14] or follow him on Twitter via @JeffReevesIP[15].

TSLA Stock – Has Tesla Topped Out?

TSLA Stock Looks Strong

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