Whether you are a Tesla (NASDAQ:TSLA) stock bull or bear, it is the most fascinating stock of 2020. Tesla stock detached from the company’s fundamentals long ago. However, it’s important for traders to monitor the latest fundamental headlines, nonetheless.
On Friday, Tesla reported record third-quarter vehicle deliveries. For a normal auto stock, record deliveries would be an excellent reason to buy the stock. But Tesla shares initially traded lower by more than 4% on the news.
Here’s a look at what investors need to know.
The Tesla Stock Numbers
The first thing I always recommend investors do when analyzing Tesla stock is forget about the share price. Forget about Eon Musk’s latest tweets. Forget about how you feel about global warming. Just look at the numbers.
Tesla delivered 139,300 vehicles in the third quarter, a record for the company. That number also exceeded analyst expectations of 137,000 vehicles, according to FactSet. Beating expectations is always good news. Third-quarter deliveries were up 53.6% compared to the second quarter.
Year-to-date, Tesla has delivered 318,350 vehicles, up 24.7% from the first three quarters of 2019. Those numbers represent a solid growth rate for Tesla.
The company has previously said it will “comfortably exceed” 500,000 deliveries in 2020. So, Tesla will now need to report another record of 181,650 deliveries in the fourth quarter to meet its guidance.
Tesla’s Unique Circumstances
For investors who own any other auto or tech stocks, the analysis above is a typical assessment of a major financial disclosure. However, Tesla stock is the exception to pretty much every rule of investing. It appears extremely unlikely Tesla will hit 500,000 deliveries for the year. But Tesla rarely hits any of its financial targets, so investors may have already assumed a full-year delivery miss long ago.
At the same time, Tesla stock showed huge gains this year. The company is literally worth nearly nine times as much as it was worth a year ago. Of course, Tesla didn’t deliver anywhere close to nine times as many vehicles in the third quarter as analysts were expecting this time last year.
Tesla investors cheered the company’s $2.18 in adjusted earnings per share in the second quarter. But the stock has been repeatedly snubbed for inclusion in the S&P 500 index, potentially due to its heavy (and fleeting) reliance on regulatory credit sales.
Revenue was down 4.9% in the second quarter. Free cash flow was down 32%.
Tesla’s Valuation
I recently wrote about how Tesla stock is extremely overvalued compared to both auto stock and high-growth tech stock peers.
There are plenty of Tesla stock bulls out there that simply want to dismiss any talk of valuation. They argue that the company’s fundamentals will eventually line up with its market cap. But I have said just how much Tesla is overvalued today and just how long it takes to grow into that valuation will eventually matter.
It took Microsoft (NASDAQ:MSFT) more than 15 years to make it back to its dot-com bubble peak. Most investors know how much of a great growth company Microsoft is. I believe Tesla could potentially be lining up for its own 15 or 20 years of underperformance once the 2020 electric vehicle market mania starts to finally die down.
Tesla reported some impressive delivery numbers in the third quarter. If the stock weren’t already up nearly 800% in the past year, I’d say it would make a great growth investment.
“Tesla has a chance to be the dominant electric vehicle firm and is a leading autonomous vehicle player as well as a vertically integrated sustainable energy company with energy generation and storage products, but we do not see it having mass-market volume this decade,” Morningstar analyst David Whiston says.
I agree with Whiston’s belief that Tesla could potentially dominate the global EV market in the long-term. Yet Whiston’s fair value estimate for Tesla stock is just $195, or about 54% below its current level. That target seems fair as well considering Tesla’s absurd valuation.
The Bottom Line
I have repeatedly said Tesla is a great company with a laughable $400 billion valuation. It’s too dangerous to short because of its large short interest and the mania surrounding the 2020 EV bubble. But it is also too dangerous to buy given it is extremely overvalued, even compared to higher-growth tech stocks.
Investors should do themselves a favor and stay on the sidelines when it comes to Tesla stock.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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.
