Whether you love it or hate it, Tesla (NASDAQ: TSLA) is the most fascinating stock of 2020. Even as Tesla stock appears to defy reason sometimes you can’t help but read the latest craziness.
This week, that craziness came in the form of record fourth-quarter vehicle deliveries. Under normal circumstances, record deliveries would be a reason to buy a stock, but Tesla has never been surrounded by normal circumstances.
Here’s a summary of what was good about the Q4 numbers, what was bad about them and where the stock could be headed next.
The Numbers
Any time I write about Tesla, the first thing I do is forget the stock price, forget the headlines, and forget the social media comments. I just look at the numbers.
Tesla delivered 112,000 vehicles in the fourth quarter, a record for the company. That number also exceeded consensus analyst expectations of 106,000, which is a positive. Fourth-quarter deliveries were up 15.4% compared to the third quarter.
For the entire year of 2019, Tesla delivered 367,500 total vehicles, up about 50% from its 2018 deliveries. That’s some impressive growth. Tesla had previously guided for 2019 deliveries of between 360,000 and 400,000 vehicles. So ultimately, Tesla came in on the low end of its anticipated delivery range for the year.
The Circumstances
If you are an investor who has only ever owned Tesla stock, the previous section is typical of how numbers from an ordinary company would be assessed. But Tesla is far from a typical company, so here’s how Tesla traders should assess the situation. Tesla almost never actually hits its targets, so deliveries even on the low end of its target range are a huge win for the stock.
On the other hand, Tesla shares are somehow already up nearly 100% in the past six months. The company is literally worth twice as much as it was six months ago, but it certainly didn’t deliver twice as many vehicles as analysts were expecting six months ago.
A large part of the Tesla rally happened after the company reported a profitable third quarter. At the time, I advised investors to keep that earnings beat in perspective.
Yes, Tesla reported its first profit of 2019, but free cash flow was down 40% in the third quarter compared to the second quarter. It was down 58% compared to the third quarter of 2018.
Automotive gross margins were down 2.9% to 22.8% in the third quarter compared to a year ago. Revenue was down 7.3%.
What to Make of Tesla Stock
Tesla remains one of the most heavily shorted stocks in the world. More than 20% of Tesla’s float is currently held short, according to S3 Partners. There are some deep-pocketed investors who believe that Tesla and its CEO Elon Musk are deceptive and/or incompetent. Ironically, these short sellers provide support for Tesla any time there is a significant pullback by covering their positions.
In the most recent quarter, Tesla reported diluted EPS of 78 cents, down 55.4% from a year ago. It reported revenue of $6.3 billion, down 7.3% from a year ago. In the same quarter, Ford (NYSE: F) reported diluted EPS of 11 cents (down 56%) and revenue of $37 billion (down 1.7%). General Motors (NYSE: GM) reported EPS of $1.60 on revenue of $35.4 billion. Those numbers were down 8.5% and 0.9%, respectively.
According to Finviz, Tesla’s forward earnings multiple is 81.4. Ford’s is 7.1. GM’s is 5.6. Tesla stock trades at 3.2 times sales. GM trades at 0.3 times sales. Ford trades at 0.2 times.
Tesla reported some impressive delivery numbers in the fourth quarter. If the stock hadn’t already doubled in the past six months and if it weren’t already priced at an absurd valuation relative to Ford and GM, I’d say buy the stock.
“We believe 2020 offers a strong event path for the stock; there are a number of catalysts over the next year, whether it be China milestones, Model Y, or new technology announcements that would allow Tesla to potentially test the upper bound of our admittedly wide bull-bear skew,” Morgan Stanley analyst Adam Jonas says.
I agree with Jonas that Tesla is making some impressive strides heading into 2020. Yet Jonas’ price target is $250, or about 43% below Tesla’s current level. That seems fair as well considering the stock’s crazy valuation.
Takeaway
I’ve said it a million times. Tesla is a great company with a laughable valuation. It’s too dangerous to short because of the potential for a short squeeze and its cult following of investors who will buy at any price. It is too dangerous to buy because of the huge valuation air pocket to the downside. I continue to recommend investors stay on the sidelines.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.
