Tesla Motors Inc (TSLA) CEO Elon Musk is a genius, and the media rightly gives him credit for that.
The guy has a literally unparalleled track record; as CEO of Tesla, CEO of SpaceX, chairman of SolarCity (SCTY) and co-founder of PayPal (PYPL), he knows how to build and grow not merely successful businesses, but groundbreaking businesses.
When Musk talks, people listen — his tweets alone have been known to move markets.
That being said, Musk’s vow yesterday to bring the production of some Tesla vehicles to China within the next two years should be looked at in a very skeptical light. It’s absolutely not a reason to run out and buy TSLA stock, that much is certain.
Musk says that producing cars in China and subsequently selling them directly to the Chinese consumer will cut the price tag of the car by 33%. This has to be a net positive for TSLA stock, yes?
Perhaps. But I wouldn’t wager a single dollar on it.
Here’s why.
Tesla’s China Plans: More Distracting than Realistic
There are two simple reasons not to rush into TSLA stock on these Chinese production plans:
1. Conveniently Announced to Distract Investors? I began this article by remarking that Musk is a genius. It’s important to realize that his genius also extends to marketing and publicity, which the ambitious CEO understands deeply.
His China announcement yesterday came during a rough patch for TSLA stock, which is off about 20% in the last month alone. Most recently, Consumer Reports downgraded the Tesla Model S earlier this week to a “worse than average” rating, sending shares cratering.
2. It’s Unclear How TSLA Plans to Actually Execute These Plans. As the Wall Street Journal pointed out in an article this morning, the Chinese government requires foreign auto companies to have a Chinese partner if they want to make cars in the country.
So sure, it would be great for TSLA if it could make its cars more affordable in China by producing locally and avoiding tariffs.
But even if that ends up happening eventually, savvy investors should still be skeptical of the two-year timeline Musk gives. After all, the Tesla Model X debuted this year, a full two years later than promised — and to limited fanfare, no less.
That’s not to mention the fact that Tesla has been notoriously bad at selling cars in China to begin with, and was forced to slash its workforce by 30% in the world’s second-largest economy earlier this year.
Bottom Line
With TSLA stock trading for 95 times forward earnings, shares are priced for perfection and have been for some time. I wouldn’t be surprised to see Mr. Market gradually realize its mistake over the next year.
Plainly and simply, I can’t see the short-term upside in this stock.
Until TSLA starts to move on profits and results — not promises and rhetoric — I’d stay far away from this (former?) Wall Street darling.
As of this writing, John Divine was long PYPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
