The year 2019 is shaping up to be yet another lost year for Tesla (NASDAQ:TSLA) stock investors. TSLA stock is up only 3% year-to-date compared to a 28% gain by the S&P 500. But Tesla’s essentially flat 2019 performance is a fairly accurate assessment of how little things have changed in the past year.
Nearly one year ago, I wrote a story entitled “Tesla Stock: Too Bad to Buy, Too Good to Short.” Heading into 2020, I believe that thesis still holds true for TSLA stock.
Looking back on that article from January 2019, it’s uncanny how few things have changed this year for TSLA stock investors. At the time, Tesla was coming off its first quarterly profit since the launch of the Model 3. That profit came in the third quarter of 2018. Today, Tesla investors’ spirits are high after the company reported a surprise profit in Q3 of 2019.
Unfortunately, Tesla’s financial track record has been extremely inconsistent. The company will need to string together at least three consecutive profitable quarters for me to buy into the narrative that its money-losing days are behind it.
Everyone who went ga-ga over Tesla’s Q3 earnings of $1.86 per share seems to have forgotten that Tesla reported EPS of $2.90 in Q3 2018. It came back with positive EPS of $1.93 in Q1 of 2019 before once again dropping to heavy losses in the next two quarters.
TSLA Stock and More Storytelling
TSLA also recently unveiled the Cybertruck, its futuristic answer to the F-150 that features indestructible windows. One thing Tesla stock investors should know by now is that Tesla is always promising the next big thing. It’s the Tesla story that keeps Elon Musk’s disciples buying shares.
The Cybertruck won’t move the needle for Tesla until at least 2021. Even then, I predict most of the sales will come from existing Tesla customers rather than new customers. In other words, the Cybertruck will likely cannibalize higher-margin Model X and Model S sales.
One of the bullish catalysts from the Q3 earnings call was claims by the company that the Chinese Gigafactory is nearly up and running. As usual, the stock rallied on hopes and dreams for the future rather than the actual business that Tesla is doing today. Of course, leading Chinese electric vehicle maker Nio (NYSE:NIO) has blamed a difficult macro environment in China for its 2019 implosion.
NIO stock is down 65% year-to-date operating in what Tesla investors see as the “land of EV opportunity.” I’m not saying Tesla can’t make China work, but it may not be the walk in the park some bulls are assuming.
The Bull and Bear Cases for TSLA
Assume Tesla can sustain the $1.94 in third-quarter EPS over the next three quarters. That would represent $7.72 in earnings over a one-year period. At $335 per share, TSLA stock would be trading at an earnings multiple of about 43.3. Remember, Ford (NYSE:F) and General Motors (NYSE:GM) are trading at earnings multiples of 22.3 and 5.7, respectively.
Tesla bulls would argue that Tesla is a growth stock, not a value stock like Ford and GM. But Tesla reported an 8% drop in revenue in the third quarter. Maybe that’s a temporary bump in the road. Maybe not. Unfortunately, Tesla’s numbers have been all over the place in recent quarters, a trend that hasn’t changed at all in 2019.
At the same time, Tesla short sellers are playing a dangerous game given TSLA stock is one of the most heavily-shorted stocks in the world. As of late October, Tesla’s short interest was $8.3 billion, making it the second-most shorted U.S. equity, according to S3 Partners.
Not only does that short interest provide buying support on every dip, there is a major risk of a short squeeze if Tesla reports blowout numbers at any point.
In addition, while Tesla’s financial position doesn’t seem to be nearly as dire as it was several quarters ago, the stock likely has limited downside. Even if the company screws up its execution, the Tesla brand has value, and its luxury models are very popular. Tesla would become a buyout target for a large auto or tech company at some point if the stock dipped low enough.
Stay Away From TSLA Stock
As I said a year ago, Tesla stock is extremely unpredictable and volatile. If you’re bullish on TSLA stock, wait another couple of quarters for the company to prove it’s on the right track. If you’re bearish, there are plenty of safer shorts out there.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.