It’s been an unbelievable run for Tesla Inc (NASDAQ:TSLA) stock. TSLA traded at $181 at the beginning of December, and within a little over six months Tesla stock doubled.
The market cap of Tesla stock is now higher than that of Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM). And, the pace of the gains has been almost breathtaking. TSLA stock took out $200 in mid-December (albeit not for the first time). It cleared $250 in January. Tesla stock holders had to wait until April for TSLA to break $300 for the first time, and two more months to see $350.
In fact, just a few weeks ago, Tesla stock looked like it was on its way to $400. But, a recent pullback (TSLA stock has declined about 9%) has interrupted the run.
Along the way, there’s been no shortage of analysts and traders calling for an end to the gains in Tesla stock. By most fundamental measures, TSLA stock looks sharply overvalued. As a result, short interest remains at about 23% of the float.
I’ve long argued that TSLA is a terrible short, and I still feel that way. But, for the first time in a long time, I see real reason to be at least cautious, if not outright bearish, toward Tesla stock.
Execution Versus Potential for TSLA Stock
Tesla stock dropped more than 2% on Monday after the company released second-quarter sales. The shipment of 22,000 vehicles was below expectations and down double-digits, sequentially, from the 25,000 deliveries in the first quarter.
Management cited production shortages in battery packs as a key problem. Those problems should be fixed in short order, as the company pointed out that the packs are “made using new technologies on new production lines.” On Wednesday, TSLA stock gave back another 7% after Goldman Sachs analyst David Tamberrino released his bearish outlook, setting the price target for Tesla stock to $180.
But, the modest miss is another reminder that Tesla’s execution has traditionally been somewhat unimpressive. Forgotten amid the 100%+ gains in Tesla stock is the fact that company missed production guidance in 2016. And, the 22K shipments in Q2 means the company barely matched its first-half projections of 47,000-50,000 vehicles.
Is that necessarily enough to change the narrative toward Tesla stock? Probably not. Investor attention is already moving toward the Model 3. CEO Elon Musk tweeted on Sunday that the first production vehicle would be completed on Friday. Musk also outlined an aggressive ramp in production, from 100-plus in August to more than 20,000 by December.
But, that schedule looks rather aggressive and itself creates the possibility of another disappointment in terms of production guidance. TSLA stock has so far shrugged off any such worries. Still, there’s reason to think that its ability to do so might not last forever.
Reality Versus Potential for Tesla Stock
One of the key reasons I don’t think a short of TSLA makes sense is the nature of the company’s opportunity. A Tesla stock bear can, in theory, be 100% right about the company’s long-term potential, or lack thereof. But, shorts need not only to be right, but be right right now (or close).
A good chunk of Tesla’s potential comes down to the Model 3. Shipping 22,000 Model X SUVs and Model S sedans isn’t what is driving the nearly $60 billion valuation assigned to Tesla stock. Rather, it’s the affordable ($35K), mass-produced Model 3 and its ability to lead what Musk believes will be a transportation and energy revolution in the U.S. and beyond.
From a trading standpoint, the move of the Model 3 from potential to reality might not be a great thing for Tesla stock. At the moment, the bull case for TSLA stock is based on what will happen next decade, and its opportunities in solar energy and autonomous driving. Moving investor focus to actual production might distract from those lofty aspirations — and the lofty valuations being modeled by TSLA bulls.
A change in focus toward actual revenue, gross margins, and production targets implies a change in focus toward the fundamentals of Tesla stock. Competition is coming, from Ford, GM, Alphabet Inc’s (NASDAQ:GOOGL) Waymo, Toyota Motor Corp (ADR) (NYSE:TM) and even startup companies like Fisker. With the stock trading at such huge multiples to out-year earnings, that could undercut some of the optimism that’s drove TSLA to nearly $400 per share.
A Traders’ Stock
Admittedly, this is a bit of a “feel” argument, but at the moment TSLA is a “feel” stock.
And, it seems like a stock due for a pullback, even though many observers have said the same for some time (and usually erroneously so). Tesla has an enormous opportunity, but it also has near-term challenges.
Management wants to ramp production from zero to 20,000 per month in less than half a year. The company still has a lot of work left to do with the acquired SolarCity business to create substantial earnings contributions from that unit.
In short, Tesla is getting down to the details of its business plan. That, in turn, raises the stakes on execution – and raises the risk of a misstep. Even after the modest decline of the past few weeks, it’s hard to argue that any errors really are priced in. And it makes Tesla stock look a bit more dangerous at the moment than it has it some time.
As of this writing, Vince Martin has no positions in any securities mentioned.
