It’s not been a great past few days for Tesla Inc (NASDAQ:TSLA) or for owners of TSLA stock. Concerns are surfacing that production of the Model 3 may be behind schedule, and a couple of high-profile stock pickers said the company was simply burning through too much cash. Never even mind the toll that new EV competition took on the TSLA price chart.
All the concerns are legitimate too.
Yet, for fans and followers of the company, as well as TSLA stock owners, the naysaying misses one overarching point about Tesla. This is a story stock with a cult-like following. The lack of profits and seemingly constant delays are just par for the course. TSLA stock is a trade, pure and simple. Pretend it’s anything but that at your own peril.
TSLA Stock Arguably Overvalued
Though it’s likely anyone reading this already saw the news in question, on the off chance you didn’t, two different pros took aim at TSLA last week.
One of them was Jim Chanos. If the name rings a bell it may be because he’s attempted to indict Tesla in the court of public opinion before. He’s a well-connected short-seller and, of course, holds a short position in TSLA stock; he benefits when it falls. His latest bear case? Tesla is ‘structurally unprofitable’, whatever that means.
Chanos’ most recent cries follows a similar concern presented by Bernstein analyst Toni Sacconaghi, who notes the $10.6 billion worth of cash burned since the company’s 2010 IPO may only be the beginning. Sacconaghi currently holds a TSLA stock price target of $265, down 22% from its current value.
Both are right in their own way. Tesla isn’t profitable — at least not on a GAAP basis — and won’t likely be turning a real profit anytime soon. That’s because, despite all it’s spent so far, Tesla is going to spend more to build out its production line for the Model 3, while simultaneously beefing up its capacity to produce the all-important batteries that power them.
Oh yeah, in the meantime, the company continues to work on an all-electric tractor trailer truck and growing its solar roof business — all while widening its network of charging stations. It would actually be surprising if Tesla was profitable.
Yet, it just doesn’t matter.
As was noted, Sacconaghi and Chanos both make valid arguments and in a different time or different situation, the colossal cash burn or distinct lack of positive cash flow might prompt investors to balk.
This is 2017, though. This is an era when a company like Amazon.com, Inc. (NASDAQ:AMZN) can kick the (meaningful) profits can down the road for twenty years and nobody blinks. This is an era when an organization like Snapchat parent Snap Inc (NYSE:SNAP) will almost certainly lose billions more in the coming years — and may never actually turn a profit — yet still whips up enough investor interest to go public and not get completely obliterated. This is a period when investors are fine with the fact that Netflix, Inc. (NASDAQ:NFLX) trades at a forward-looking P/E ratio of 89, even as hordes of competition start to get traction.
So, no, Tesla’s cash-burning habit that leads to habitual losses now may or may not matter.
And just for the record, this is coming from the same guy who more than once lamented the dangers of putting story stocks like Tesla on a pedestal. That warning still stands, but I’d also never deny that enough of the right investors are willing to ignore the fiscal metrics and buy Tesla not because of what it might earn, but because of the simple fact that it’s so revolutionary.
For the modern market, that may be enough.
Bottom Line on TSLA Stock
Don’t read too much into the message here. Just because I’m rejecting the importance of Chanos’ and Sacconaghi’s arguments doesn’t mean I don’t agree with them. I agree with both of them. Indeed, I’ll even agree with their simple expectation that TSLA stock is likely to move lower in the foreseeable future after the rally from early this year slowed down nearing resistance at $391.
I’m simply saying that these professional stock handicappers are using a fiscal standard that doesn’t apply to a small subset of the market. For better or worse, figuring out where the TSLA price trend is truly pointed is mostly an exercise in keeping your finger on the pulse of the market’s sentiment regarding the stock.
It appears to be turning sour in the short run, but I sure wouldn’t bet against it for the long haul anytime soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.