Tesla (NASDAQ:TSLA) took a hit and bounced back quickly. It fell on Oct. 3 following a miss on third-quarter car deliveries. However, a subsequent price recovery occurred amid an analyst downgrade regarding this miss.
Still, one side effect of this increase is that TSLA trades at an elevated multiple. This valuation comes amid behavior that has at times unsettled both investors and those who follow Tesla. Although most can credit CEO Elon Musk for this success, one has to question whether his shortcomings factor into the stock price.
Tesla Stock Downgraded After Delivery Miss
Many of my colleagues have rightly pointed out the tendency of Mr. Musk to overpromise and underdeliver. That happened again with the production numbers. Third-quarter deliveries of 97,000 vehicles leaves the company likely short of its own targets. As a result, Tesla will have to produce 105,000 cars in the fourth quarter simply to meet its minimum guidance.
This time, Musk’s failure to deliver led to a downgrade. Wedbush analyst Daniel Ives issued a neutral rating on Tesla with a price target of $220 per share. This comes in significantly short of the $245 per share stock price where Tesla trades now. It also lags the FactSet average of $271 per share.
In this downgrade, Mr. Ives cited the aforementioned production numbers, as well as the lack of sustained profitability.
“We continue to believe the stock will be range-bound and under some pressure until the company reports earnings,” Ives wrote. “Last quarter the demand [and] delivery numbers looked great only to be followed by a very disappointing gross margin profile.”
The company has not yet set a date for the release of the third-quarter earnings report. For now, analysts forecast a loss of 42 cents per share before TSLA turns profitable again in the fourth quarter.
TSLA Should Factor in CEO’s Behavior
Unfortunately for TSLA stock longs, the problems with the equity seem to hinge on forecasting the behavior of Mr. Musk himself. The company trades at a forward price-to-earnings (PE) ratio of just over 62. That may seem high in some respects. Still, analysts forecast earnings increases to average 114.3% per year over the next five years. This kind of growth rate could make the expense of Tesla stock worth paying.
However, that valuation may not price in the antics of Mr. Musk himself. This goes well beyond promises not kept. Many will remember the threat to take Tesla private, social media posts that attracted the scrutiny of the SEC, and alleging the existence of saboteurs within the company. Such acts have often hurt the stock price of TSLA.
However, as history saw with the company’s namesake, Nikola Tesla, inventive genius and eccentric behavior appear to go together. Elon Musk accomplished something previous entrepreneurs tried and failed to do, make the electric car commercially viable. Still, this kind of behavior also breeds the uncertainty that often causes equities to fall.
The Bottom Line on TSLA Stock
TSLA does not price in the eccentricity of the company’s CEO into the stock. To be sure, Elon Musk deserves credit for creating a car company from scratch, something even a seasoned car executive such as John DeLorean failed to do.
He also built an electric car that appealed to consumer tastes. Firms such as Nio (NYSE:NIO) have not succeeded at replicating this success. Moreover, Tesla forced established automakers such as Ford (NYSE:F), GM (NYSE:GM) have had to play catch-up.
However, Mr. Musk’s behavior has also sabotaged some of this potential. The latest shortcoming involves falling short of production goals. This led Wedbush to downgrade TSLA and move it to a neutral rating.
This also leads to questions on how to approach Tesla stock. Despite concerns over Mr. Musk, the company still appears positioned to maintain its status as a top player in the electric vehicle market. For this reason, I see TSLA as a winner long term.
Still, the issue lies in its present valuation weighed against Mr. Musk’s personality traits. If investors can count on Tesla to deliver on promises, 62 times earnings for profit growth that will more than double every year looks like a reasonable bet. However, given the uncertainty caused by the CEO’s erratic behavior and the numerous promises not kept, investors should think twice about paying a premium price for TSLA.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.