Tesla (TSLA) is one of the market’s most widely followed stocks, and with good reason. The stock’s rise from $25 in 2011 to as high as $290 last year made many folks into millionaires overnight.
The company has an innovative product, a charismatic genius as its leader, and plugs into the societal yearning to leave fossil fuels behind and head toward a healthier and cleaner tomorrow.
It makes for a fantastic story. It’s an easy stock to sell, people love the concept, and who would want to bet against an innovator like Elon Musk? If the intrinsic value of companies were based on emotions, stories, and good feeling, Tesla would be a long-term buy and hold investment undoubtedly.
Unfortunately, stock prices often diverge widely from a company’s underlying worth, and that’s arguably been the case with Tesla’s shares since about 2013. The 12-fold surge in Tesla shares seems to greatly exceed the significant business improvements in the company since then.
Back then Tesla was still struggling to prove its product was viable, that its price point would attract significant retail demand, and that its supply chain was ready to ramp up. It’s hard business launching an auto manufacturing firm from scratch after all. The company also faced daunting financing challenges getting all the capital in line to ramp up production.
The company still faces existential challenges. Can they ever get out of their luxury niche and produce vehicles that the middle to upper middle class will buy? Will they be crushed by increasing competition from far bigger and more capitalized auto manufacturers?
Competition isn’t just from the lower-end players like General Motors or Nissan, though those companies have been making a splash. Now we have news that Mercedes-Benz will have a competing EV out within a few years. This on top of Porsche unveiling its new luxury EV prototype.
Will falling gas prices make the cost advantages of their vehicles disappear? Is Elon Musk too busy with his numerous other projects including SolarCity (SCTY) and the various other things such as the hyperloop and SpaceX?
And then there’s still near-term financial concerns. The company has $1.1 billion in cash and lost $1.2 billion in cash last year between operations and new capital spending. At some point sales are supposed to ramp and provide the company operating cash flow.
But if it doesn’t in fact happen soon, the company will need to raise more cash, either through debt (of which they already have $2.8 billion) or by selling stock.
With all this in mind, it can be somewhat difficult to think Tesla is worth more than $30 billion in market cap. Ford (F) by example, is worth less than $60 billion, or less than double Tesla. No offense to Tesla, but it’s questionable whether they’ve done enough to already justify half the valuation of America’s largest and most iconic automaking brand.
The market seems to be waking up to these potential headwinds. Tesla stock peaked around $290/share back in November 2014. Tesla would then fall as low as $185 per share in January this year. After a brief bounce, shares headed lower again in March touching a low of $181.
Fears of the stock breaking down faded though, as shares rallied though the spring and early summer. They’d ultimately peak out at $286 in July, slightly below the high from last winter. This markets a significant double top, where the stock attempted to make new highs and was turned back.
Shares fell to $215 during the August flash crash, sprung back to $270 in September but have fallen another 15% in the ensuing weeks while the rest of the market rallies.
On a fundamental basis, the stock seems wildly overvalued, trading at 100x near year’s forecast earnings, which would be a big improvement from its current unprofitable and dangerously cash-low state.
The stock has long outperformed the company’s underlying performance as investors have bought into its great story. But market support for the stock seems to be fading.
When stocks drop into market rallies, it’s a sign something is wrong. Tesla has fallen from $250 down to $230 in the past three days while the S&P 500 continues notching gains. It’s a bad omen.