Tesla Stock Investors Need to Keep It Real

Don't trade TSLA stock based on emotion … it will only lead to trouble

Tesla (NASDAQ: TSLA) has long been one of the most divisive stocks on Wall Street. But with shares now up 278%, it can be difficult to put emotions aside and look at exactly what is and isn’t happening with Tesla stock.

Tesla Stock Investors Need to Keep It Real
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There’s no question that the EV maker has reported back-to-back earnings reports that show steps in the right direction. But when a stock goes parabolic the way Tesla has, it can be very difficult to keep perspective on the fundamentals and make rational investment decisions. At this point, even Tesla bulls are starting to concede that the stock’s latest price action is a bit ridiculous.

Whoa … About Those Numbers

Let’s start with Tesla’s numbers. A week ago, the electric vehicle maker reported $2.14 in adjusted EPS, beating analyst estimates by 24.4%. Tesla also reported $1 billion in free cash flow, another major accomplishment.

Comparing those numbers to a year ago, EPS was up 10.9%. Free cash flow was up 9.8%.

Automotive gross margins in the fourth quarter were 22.5%, down 0.3% from last quarter and down 1.8% from a year ago. I swear I’m not making these numbers up.

Overall revenue was up 2% from a year ago. Vehicle deliveries were up 15.4% compared to the third quarter.

In a nutshell, Tesla reported solid low-teens earnings growth and mid-teens delivery growth. But margins continued to trend down, pressuring revenue growth. Overall, I’d describe Tesla’s quarter as solid. The numbers above speak for themselves. Since Tesla reported them on Jan. 29, the stock is up 56.4%.

Tesla Stock Valuation

When it comes to Tesla stock, it’s always necessary to force yourself to forget everything you love or hate about Elon Musk or green energy or SpaceX or Wall Street, for that matter. Investing based on emotion, good or bad, is the quickest way to go broke in the stock market.

The recent rally in Tesla shares has made the company by far the most-valuable U.S. auto company. Even after the shares went off a cliff on Tuesday. Tesla’s market cap is now $132 billion compared to $50.1 billion for General Motors (NYSE: GM) and $33.7 billion for Ford (NYSE: F). If this were a board game, Tesla’s value would buy you both Ford and GM, leaving you with more than enough to build hotels on Boardwalk and Park Place.

One of the biggest things Tesla bulls went crazy over in the Q4 earnings report was the company’s guidance for 2020 vehicle deliveries that should “comfortably exceed 500,000 units.” To keep that number in perspective, GM just reported 7.71 million vehicle sales in 2019.

In other words, if Tesla hits its own growth targets in 2020 — which long-time investors know is a very big if — its business will be about 6.5% the size of GM’s. Assuming Tesla can maintain its profitability for a third consecutive quarter and beyond, analysts are calling for EPS of $7.96 in 2020. Based on that number, Tesla’s forward PE ratio is currently around 108. GM’s is 5.4. Ford’s is 7.2.

Reality Check

This is the point at which Tesla bulls have to be honest with themselves. Citron Research founder and general Tesla bull Andrew Left disclosed this week that he is now short Tesla stock. I see his explanation as reasonable and rational.

“We believe even Elon would short the stock here if he was a fund manager. This is no longer about the technology, it has become the new Wall Street casino,” Left wrote on Twitter.

Other analysts are echoing the same sentiment. Even if you love Tesla, the stock has become completely unhinged from reality. Bank of America analyst John Murphy said following earnings:

“While TSLA’s 4Q:19 results came in better than most expectations and just ahead of our estimates, we believe this is reflected in the 40% run up in TSLA stock year-to-date, and 12%+ stock reaction in after-market trading.”

Since he wrote that, the stock is up another 40%. Murphy actually raised his Tesla price target from $350 to $370, a target that would have been considered very optimistic six months ago.

How to Play Tesla Stock

Tesla stock appears to be the latest Wall Street mania: a bubble period defined by irrational exuberance. Tesla is drawing comparisons to dotcom bubble stocks like Qualcomm (NASDAQ: QCOM) and the housing market prior to the financial crisis. But younger investors can think of it more like the more recent bitcoin bubble.

Like bitcoin, it will be difficult to predict where Tesla stock will peak in the near-term. But things will eventually get real ugly, real fast when the excitement of the rally wears off and Tesla traders come back to reality.

At this point, Tesla is far too dangerous to short. If you are attempting to bet against the stock, I would recommend buying put options that expire at least six months or a year down the road to cap your risk.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/tesla-stock-investors-need-to-keep-it-real/.

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