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Tesla Motors: A Bubble About To Burst?
By: Martin Tillier
Teasla Motors, Inc. (TSLA) is, in many ways a phenomenal success story. They have disproved the naysayers and produced a viable, appealing electric sports car, then have expanded their model line. Following better than expected Q2 earnings three weeks ago, the stock continued on an upward trajectory, reaching a high of $173 on Monday.
Many have been made to look foolish during this meteoric rise by attempting to call the top, and until now I have resisted the temptation. I can resist no more. Following the earnings release, I waited and reserved judgment; I wanted to see how investors reacted before weighing in.
Considering the size of the beat, and a profit of $0.05 per share after adjustments, I would say that the reaction has been somewhat muted. I hate to sound like a broken record, but the market is very prone to “buy the rumor, sell the fact” and TSLA’s rapid appreciation has been on anticipation of a profit. Now that profitability has arrived (although some maintain that that profit after adjustments is smoke and mirrors) new buyers may be hard to find. Like Apple (AAPL) at $700, it is likely that buyers will run out fairly soon. Any fund or institution that wants to buy TSLA probably already has and the phenomenal price appreciation has probably resulted in their holding being significant as a percent of the portfolio. They will not hesitate to sell at the first sign of real weakness, so any downward move is likely to be exaggerated.
This is not the only similarity to AAPL at its peak. Proponents of TSLA tend to also be fanatical in their devotion, just like the Apple fan-boys, and anybody who questions the stock is seen as some kind of evil presence. This lack of rationality is a classic sign of a bubble. It is not that TSLA is bad, it’s just that, based on all known variables, the stock looks way overvalued right now.
The big difference between AAPL and TSLA, of course, is that Apple was, and is, a phenomenally profitable company with more cash than they knew what to do with; once again, hardly a positive for Tesla.
Management has predicted an increasing profitability, but there are several challenges to the kind of growth that would make even the current valuation of close to $20 Billion look inflated. Firstly, as detailed in this article by John Petersen at Seeking Alpha, continued growth is dependent on increased supply of batteries, something which even Elon Musk, Tesla’s CEO, thinks will present a challenge.
Secondly, there must be significant changes in infrastructure or technology here in the US if Tesla’s products are to cross over to the mainstream. As great as the company’s cars are in many ways, their practical use is still limited by one glaring problem. They have a range of around 200 miles and, while more charging stations are appearing every day, they are still relatively rare in most of the country.
There are other, less tangible things that make me more inclined to short TSLA here than buy it. Elon Musk recently touted a much publicized proposal for an alternative transportation system on the West Coast, dubbed the “hyperloop”. This could be a great idea, and the world needs visionaries with grand plans, but if I am an investor in TSLA, does this idea make me happy? It produces in me a nagging suspicion that the company’s inspiration is becoming a little bored with the mundane task of growth, and moving on to other things. In the long term, diversification in alternative transport could well be a great thing for Tesla or any other company, but, in the short term, any attempt to realize the vision could eat up time and cash.
I want TSLA to succeed because I genuinely believe that we must, at some point find a viable alternative to fossil fuels. More than that, I believe they will succeed, but neither my wants nor my long term view can outweigh the fact that TSLA is looking more like a bubble every day. Buying the stock now at a P/E over 150, based on exponential growth expectations that even the CEO sees problems with, doesn’t seem wise.