To use a phrase that we’re all too familiar with now, I think it’s time to socially distance from Tesla (NASDAQ:TSLA) — investors shouldn’t get within six feet of TSLA stock.
As of its Oct. 20 opening price of $431 per share, Tesla is worth $400 billion on expected sales of around $30 billion. The trailing price to earnings ratio is a staggering 1,080. There’s also no dividend, nor the prospect of one.
Yet, almost one in five shares are still held short, and more analysts are suggesting you sell it rather than buy. So why did Wedbush recently raise its price target again, this time to $500 a share? In some ways, it seems that Tesla is moving too fast for its own good.
Don’t Bet Against TSLA Stock
Of course, it’s hard to deny the company’s prowess right now. For instance, Tesla beat delivery expectations for the third quarter.
China — the market no American company could crack — is also proving to be a gold mine for TSLA stock, Wedbush says. It could soon represent 40% of Tesla sales. Demand there remains robust, with the novel coronavirus pandemic mostly in the rearview mirror. Car sales are surging in general.
But instead of just talking about cars, Tesla bulls are now talking about batteries as well. The latest 4680 cell is expected to last 2 million miles. Additionally, Tesla is foraying into solar roofs.
Big results are grist for a momentum investor’s mill. Less than a year ago, before its split, Tesla was selling for about $50. If you put $50,000 in then, you now have over $400,000.
The company is due to report results Oct. 21, and analysts are expecting revenues of $8.2 billion as well as profits of over 50 cents per share. But there’s a “whisper number” of 82 cents. When whisper numbers are that much higher than analyst estimates, I can’t help but be skeptical.
Warning Lights on the Dashboard
Despite all of the promising numbers, the shorts still do have an argument.
Trefis analysts have wagered that TSLA stock could easily fall to $150 per share. The analysis is built on slowing growth and shares hitting a price to earnings ratio of 35. None of these things sound unreasonable.
What’s more, as much as Tesla owners love their hyper-modern cars, there are also haters out there. In Sweden, a Tesla store burned recently, destroying seven cars. Arson is suspected. A trend away from conspicuous consumption could hurt the company.
Finally, Tesla started squeezing buyers for fatter profits. It has cut its used car warranty and dropped its one-week refund and return policy. Tesla also recently suffered a network outage, leaving customers unable to connect to their cars or re-charge them. Needless to say, all of these things haven’t exactly built good will between Tesla and its consumers.
The most reasonable argument I can find against TSLA stock starts with China.
China doesn’t like foreigners eating its markets. The government there has begun subsidizing Chinese car company Nio (NYSE:NIO), and has billions more invested in state-run car plants.
Then there’s the numbers game. As numbers grow, the growth gets harder. You can get a 1,000% increase going from sales of 50,000 to 500,000. But to get another 1,000% increase, you must sell 5 million cars. Tesla is now being valued on that basis. There were 17 million vehicles sold in the U.S. last year, total.
Of course, I still pity the fool who would short Tesla. But that doesn’t mean I’m buying it.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.