The novel coronavirus may have decimated the auto sector, but you wouldn’t know it from the recent performance of Tesla (NASDAQ:TSLA) stock. The electric car maker’s shares have more than doubled from their pandemic sell-off lows. With TSLA stock inching closer to prior 52-week highs, are investors foolish, or shrewd buying into what’s the ultimate “story stock?”
That’s a hard question. On one hand, Tesla seems like the perfect stock to sell short. A frothy valuation. Questionable accounting practices. A controversial CEO. Yet, despite years of yelling “the emperor has no clothes,” Tesla bears have been proven wrong time and time again.
But things could be different this time. TSLA stock was able to keep rallying higher on the heels of a strong economy. However, an extended auto industry recession could mean a reversal of fortune.
Tesla stock mania may finally come to an end. Yet, given the company’s uncanny ability to remain bulletproof, shares may not see the epic fall bears have been predicting for years.
Let’s dive in and see what’s next for this “love it or hate it” stock.
TSLA Stock Earnings and Guidance
Tesla announces earnings after the close April 29. Analyst consensus calls for losses of 21 cents per share. On the surface, quarterly losses look like bad news. But a loss of 21 cents a share would be an improvement from the prior year’s quarter. Revenues are also expected to climb 28.9% year-over-year.
But it’s probably guidance, not quarterly results, that investors will be looking at today. Morgan Stanley’s Adam Jonas projects the company will lower full-year guidance, in light of the more challenging economic enviornment. The analyst believes investors will react positively, as long as it appears a recovery happens in the second half of 2020.
I agree with Jonas’ take. With so much enthusiasm behind Tesla stock, I can see investors cutting them some slack for current headwinds. Even news the company wouldn’t be able to re-open its Fremont, CA plant as soon as May 4 hasn’t done much to prevent shares from soaring higher.
Add in positive news from the company’s Chinese operations, and Tesla mania could keep on trucking. But with the company valued considerably higher than the rest of the automotive space, are valuation concerns starting to have an impact?
Valuation Concerns May Finally Matter
Based on stock market valuation, Tesla is leaps and bounds ahead of “Detroit Three” automakers like General Motors (NYSE:GM), Ford (NYSE:F), and Fiat Chrysler (NYSE:FCAU). And as its stock price rallies, it’s catching up with Toyota Motor (NYSE:TM) in terms of market capitalization as well.
This is despite Toyota having more than 11 times Tesla’s annual sales. The company’s forward price-to-earnings (P/E) ratio is 324.6, the kind of valuation you see more with tech stocks than auto stocks.
For quite some time, valuation hasn’t done a thing to dampen “Teslamania.” But now, the analyst community is starting to have some concerns. One of these is Bank of America’s John Murphy. As InvestorPlace’s Wayne Duggan wrote April 28, the analyst downgraded the stock to “sell,” giving shares a $485 price target. His rationale? Valuation.
Murphy is not alone. Earlier this month, Bernstein’s A.M. Sacconaghi, Jr lowered his price target from $730 to $500 per share. However, this analyst’s rationale was more related to a delayed auto industry rebound rather than simply valuation.
Sacconaghi pointed out it typically takes the auto industry 3-5 years to recover from a recession. Tesla bulls may see the company as more of a tech play, erroneously interpreting that to mean it’s immune from auto industry troubles.
It’s not as if Tesla is in the software business. They build automobiles. It’s a capital-intensive, cyclical industry. The past few years have been good for the auto industry. But a sustained downturn could mean an unexpected plot twist for this “story stock.”
Today May Be the Short’s Time to Shine
Short-sellers have waited years for vindication. They’ve lost billions of dollars betting against this company. But we may finally be reaching a point where going against the crowd pays off when it comes to TSLA stock.
In prior years, a strong economy propped up this “story stock.” But now, with the auto industry headed for what could be a multi-year downturn, it’s going to be harder for Elon Musk and Co. to keep shares climbing higher.
Don’t go hog wild with a short position, though. The company’s shares could head back above $900 per share. Even if the company’s earnings and guidance fall short of expectations. You could be burned like so many in years prior. Still, the current environment may be the right time to go short TSLA stock.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
