In January of 2019, I wrote a story entitled “Too Bad to Buy, Too Good to Short.” Nearly a year and a half later, I think that description of Tesla (NASDAQ:TSLA) is as accurate as ever.
From a fundamental perspective, this week is a big week for Tesla stockholders: the company is reporting second-quarter vehicle delivery numbers.
For a typical auto stock or tech company, unit sales would be a critical piece of information. However, I think at this point there’s plenty of evidence to suggest the market likely won’t care about whatever delivery number Tesla reports this week.
Strategic Wealth Partners CEO Mark Tepper recently called TSLA “the most impossible stock to understand.” But to me, the best way to understand Tesla is to look to the past at the growth path of some of the biggest tech companies in the world.
Delivery Numbers
First things first. Let’s talk delivery numbers. Tesla delivered 88,400 vehicles in the first quarter of 2020, down 21% compared to the previous quarter.
For the full year 2019, Tesla reported 367,500 vehicles, an average of 91,875 per quarter. For 2020, Tesla has guided that full-year deliveries should “comfortably exceed 500,000 units.” To hit 500,000, Tesla will need to average 137,200 deliveries per quarter over the next three quarters. Consider that in the second quarter of 2019, Tesla delivered just 95,200 vehicles.
According to Credit Suisse, analysts are expecting Tesla to report roughly 70,000 vehicle deliveries in the second quarter, down 26.4% from a year ago. Credit Suisse is projecting a huge “beat” on deliveries in the range of 90,000 to 100,000 vehicles. But the middle of that range would still represent essentially flat year-over-year growth.
Tesla Stock Valuation
Luckily for shareholders, it doesn’t matter what vehicle number Tesla reports.
Once again, analysts are expecting second-quarter deliveries that are down 26.4% from a year ago. Bullish analysts are calling for 0% growth. Recent comments from CEO Elon Musk suggest the company might just break even on profits in the quarter.
These are not the type of numbers that typically inspire confidence in investors. But Tesla stock is up 350% in the past year nonetheless.
Tesla is hoping to deliver 500,000 vehicles in 2020. That’s not going to happen, but let’s assume that it does. Tesla’s market capitalization is way more than double that of Volkswagen (OTCMKTS:VWAGY). Volkswagen delivered 10 million vehicles last year.
“I couldn’t be more bearish. Look, Tesla is completely detached from reality,” GLJ Research founder Gordon Johnson says.
Others, like Mark Tepper, CEO of Strategic Wealth Partners, have seemingly thrown in the towel when it comes to Tesla stock.
“Tesla is the most impossible stock to understand,” Tepper says. “It’s probably the only stock where the CEO can say the stock is too expensive, and then it goes up 25% over the next month.”
Tepper, of course, is referring to Musk’s May 1 tweet in which Musk said, “Tesla stock price is too high imo.” At the time, TSLA was trading at $701. Two months later, Tesla stock is up 43.9% to $1,009.
How To Play It
Back in 2000, investors were certain the internet was the future. Cisco Systems (NASDAQ:CSCO) was a market leader in computer networking, the epicenter of the internet boom. Long story short, Cisco’s revenue soared 132% from January 1, 2000 to January 1, 2010. Its share price plummeted 54.1% during that 10-year stretch.
Morgan Stanley analyst Adam Jonas says it’s a long shot for Tesla’s business to justify its current valuation by 2030. Sound familiar?
Tesla is caught in the middle of an electric vehicle market bubble. Tesla is a great company, just like Cisco was in 2000. But investors need to understand that investing is not black or white. A great long-term growth company can also get caught in a market bubble. Cisco, Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) are all excellent examples of great companies that found their stocks down more than 45% each from 2000 to 2010.
Bubbles are by definition irrational. Tesla stock is currently at around $1,000. It could get to $7,000 by the end of 2020. It could also drop to $200 by the end of the year.
Stock market bubbles are notoriously unpredictable and dangerous. Tesla could report 20,000 vehicle deliveries this week, and the stock could rise 20% on the news. When the market gets irrational, rational investors should simply stay on the sidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
