Do you want to invest, or do you want to gamble? That’s the essence of my stock advisory newsletter, The Liberty Portfolio. Gambling has a negative expectation over time, where as investing has a positive expectation over time. Then there’s Tesla Inc (NASDAQ:TSLA), which is like putting it all on “double zero” on the roulette wheel 35 times in a row, expecting to make a fortune.
![Only a Momentum Investor Could Love Tesla Inc (TSLA) Stock](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Tesla Model 3
Sure, you can ride the momentum wave on TSLA stock. Maybe you already have. If you enjoy gambling, have at it. Of course, if you want to actually invest in a company for the long-term, TSLA stock is one of the worst on the market.
It doesn’t make a profit. Its product is facing questionable demand and doesn’t generate enough revenue to sustain the company. Other manufacturers are developing competitive products.
Much of Tesla’s success has been the result of rent-seeking and other financial incentives, as well as questionable equity raises and purchases of unrelated companies.
Rebate Program Volatility and Uncertainty
Case in point; there was a lot of optimism surrounding California’s AB 1184. The federal rebate program for electric vehicles will expire soon, and California is trying to pass a bill which could generate $3 billion in new funding to offset this loss.
But, the fine print in the bill mentions this is only for “compact electric vehicles,” which only means the Model 3 — not the big ticket Model S and X. It may not even apply to the Model 3, either, because it is technically considered a “mid-sized” car.
Might I be wrong about TSLA stock? After all, Amazon.com, Inc. (NASDAQ:AMZN) went for years without making a profit and has still only made a little bit of money. The difference, though, is that Amazon didn’t have enormous costs to deal with, nor tons of debt. It grew prudently and is now generating significant free cash flow.
Is it possible that TSLA stock can develop a real bottom line, that it can truly make money and can support some kind of valuation? Sure it can. The question for those holding Tesla stock is the same as it is with all momentum stocks: what happens when the music stops?
I don’t actually expect the music to stop with some news out of Tesla. I think Tesla stock is going to get cut in half, or worse, when the market finally wrings out its excess — of 25%-30% for indices and much more for hype stocks like TSLA.
Bottom Line on TSLA Stock
You have to remember what happens in market panics. Rationality goes out the window. People just start to sell, and with computerized trading, large declines can happen very quickly.
It isn’t just retail investors who have bid Tesla stock up. Institutions and money managers feel required to hold TSLA stock in their portfolio or they’ll be considered foolish. “How could they not be in this “fantastic” stock?” No hedge fund manager wants to hear that.
But when the market starts to fall, TSLA stock and all the other momentum stocks are going to crater. Selling will intensify as everyone bails out. Now, should this occur at a time when Tesla is running low on cash and needs to do an equity raise, that could create even more selling.
Much will depend on market perception. Will the market recover quickly, or will it enter a bear phase? If it’s the latter, TSLA stock could find itself in a world of financial hurt.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.