Up front, it’s very difficult to value Tesla Inc (NASDAQ:TSLA) stock. There are no earnings, so any TSLA stock predictions are based on extrapolations years into the future. Even the torrents of news, both bullish and bearish, about the company and its rock star CEO Elon Musk are hard to keep track.
So many variables go into modeling earnings into the next decade, and beyond. That’s why I’ve written that Tesla bulls should stay humble, even as the stock has climbed. It’s also why I think that TSLA stock is a terrible short. Reasonable investors can have significant disagreements over what the shares are actually worth.
That said, it does feel like TSLA stock is set up to fall through the end of the year after posting a YTD gain of more than 57%. I’m not short Tesla and I don’t have much interest in doing so. But a company whose valuation is based on potential seems to be getting to the point where it may disappoint investors one too many times.
When Does the Good TSLA News Come?
The long-running question about Tesla stock has been when the company’s disappointments will actually matter to the market. As the Wall Street Journal pointed out in August 2016, Tesla’s history is littered with broken promises and missed targets. Yet, over and over again, investors have just shrugged off bad TSLA news.
But the big miss in Model 3 production might be the miss that finally raises significant, and persistent, questions about Tesla’s execution. Bear in mind that, as the WSJ pointed out last year, the Model 3 originally was supposed to be ready in 2014. And yet just 260 cars were produced in the recent September quarter against predictions of 1,500.
Tesla attributed the issue to a bottleneck, and said production will ramp at some point. But from a long-term standpoint, the slowing production and the need for increased labor calls Tesla’s gross margin targets into question. A bearish call from Jefferies analyst Philippe Houchois, who predicted TSLA earnings would be negative until 2020, cited that concern. And with TSLA stock down since that call, Houchois certainly isn’t the only one who is worried.
Confidence in Tesla Stock Predictions
More broadly, the last few weeks have looked a lot like the bearish characterization of Elon Musk as a better publicist than executive. The company is developing a new facility in Shanghai, while the proposed facility in Buffalo appears badly behind schedule. Musk is rivaling President Trump on Twitter Inc (NYSE:TWTR) discussing the power grid in Puerto Rico while Model 3 production falters and there’s a recall on the Model X.
Again, TSLA stock is based largely on confidence. And at a certain point, that confidence is going to waver. It’s not enough to simply argue that Tesla will get to where it needs to go, eventually. For one, competition is rising, with even General Motors Company (NYSE:GM) stock rising over the past few weeks based on optimism about its EV and self-driving initiatives. That aside, delayed earnings are worth 8-10% less each year, depending on the discount rate — and so is Tesla stock.
So much is priced into TSLA stock — which is valued in the same neighborhood as both GM and Ford Motor Company (NYSE:F) — and so much competition is on the way, that execution is paramount.
Do TSLA bulls really see that execution as acceptable over the past few months or the past few years? Yes, Tesla’s cars are adored. The achievement of building a car manufacturer from scratch is impressive. But this is a company with a $56 billion market cap. It’s operating in a space targeted by Toyota Motor Corp (ADR) (NYSE:TM), Volkswagen AG (ADR) (OTCMKTS:VLKAY), and every other manufacturer. Even Alphabet Inc (NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL) may have a say.
Tesla unquestionably has a head start. But rivals are coming as fast as they possibly can.
TSLA Stock Looks Troublesome
And, to be blunt, recent performance just isn’t good enough. That may show up in TSLA stock soon enough. The stock is nearing a 12-week low, and support around $335. From there, it’s another leg down to $320. Technically speaking, after that, it’s “look out below”.
Fundamentally, the argument surrounding TSLA stock and future earnings will rage on. But it’s going to be a lot harder for Tesla bulls to make that argument without concrete success. That starts with getting Model 3 production right — and it will need to continue from there.
As of this writing, Vince Martin has no positions in any of the aforementioned securities.