Beware! Tesla is a bubble just waiting to burst

tesla

Congratulations to Tesla (TSLA) shareholders for the recent, astounding gains in the company’s stock. In spite of – or because of – the immense short position in Tesla shares, the stock has risen from about $54/share at the start of May to about $103 as of May 30.

Now Tesla longs are probably weighing their next move.

May I make a suggestion? SELL! Run for the hills!

TSLA Chart

TSLA data by YCharts

OK, that’s perhaps a bit dramatic, but really, it’s how I personally feel.

What has me so sure that it’s time to move on? Let’s start with the emergence of self-justifying babble from Wall Street analysts. After the company reported a better-than-expected “profit” in early May, the stock jumped well past most Tesla analysts’ price targets.

Here’s how Morgan Stanley’s Adam Jonas put it in his subsequent note to clients [emphasis mine]:

Our rating, estimates and price target are under review, pending our analysis of changes to the company’s business model, addressable market and the associated risks. Taking nothing away from the accomplishments of the Tesla team, triangulating the fundamental valuation with the share price is more challenging than for other stocks.

My translation?

Tesla stock has gone &<@!)?(*%#  crazy. So much so that you can’t reasonably expect me to stretch any of the parameters in my financial model (like growth rate and gross margin) in order to justify the current price in our usual Wall Street way. Does a forward P:E ratio of 180 make Tesla stock overvalued? Of course it does! I just can’t print that in a research note. Thanks, and don’t forget to vote for me in the Institutional Investor survey.

I’m just kidding about Mr. Jonas, who by all accounts is a fine analyst. But his concerns about “triangulation” proved unsurprisingly short-lived, and just one day later, he issued another note. In it, he raised his price target from $47 to $103 (the stock was at $87.80 at the time), based on a variety of factors, such as the possibility that “pound for pound,” Tesla might have the strongest brand in the auto industry.”

This would probably come as a surprise to, say, Ferrari, whose own brand was recently voted the most powerful commercial brand in the world. Not just within the auto industry. The most powerful among all brands.

And I believe the reality distortion field extends across Wall Street. Deutsche Bank’s analyst wrote post-earnings that he was “re-assessing [the] valuation framework” in his attempt to rationalize a new, much higher price target for Tesla. Yeesh.

But I digress. My point is that I believe Tesla stock is being propelled higher by a frothy mix of unexpected profits, huge short interest and a collective amnesia that there already exists quite a few electric cars available for sale at much lower prices than Tesla’s excellent Model S.

So where does Tesla go from here? Well, it’s certainly possible for the company to build a profitable business around high-end cars. This strategy served Porsche so well it was able, in 2007, to accumulate a 35% stake in the much larger Volkswagen. Alas, Porsche overplayed its hand and after unit sales dropped by 25% from 2008 to 2009, Volkswagen turned the tables and “re-structured” their way into complete ownership of Porsche.

But Tesla seems bound and determined to move down-market. CEO Elon Musk has promised that a ‘Gen 3’ mass market car is coming, “in a few years.”

Only one problem with that plan: the Gen 3 mass market car is already here. It’s called the Nissan Leaf. The base Leaf, the model S, has an MSRP of $21,300 after applicable tax credits. Is the Leaf as nice an automobile as Tesla’s proposed Gen 3 car – described by some as similar to a BMW 3-series – is likely to be? No, but that’s only because of strategic choices by Nissan, not a function of its ability to produce high end cars (e.g., Infiniti).

Good luck to Tesla competing with Nissan’s global supply chain; the Japanese automaker sold 4.9 million vehicles in 2012. Let’s see. Carlos Ghosn? Or Elon Musk? Hmmm.

There is nothing game-changing about Tesla that hasn’t already been accomplished by other automakers, in some cases several years ago and without 9-figure loans from the U.S. government. Tesla’s decision to use an 85 killowatt-hour battery pack (the Leaf’s is 24 kW-h) has resulted in an electric car with greater range. Fine. But that’s just a strategic design choice, not a competitive advantage protected by patents or trade secrets.

Electric cars all have the same virtues, like lower cost-per-mile than traditional internal combustion vehicles of comparable size and duty. But only a few electric car manufacturers have the economies of scale necessary to compete in the real, non-subsidized world. Tesla is not one of those companies today. Tomorrow? Perhaps. But not today and not soon.

Did anybody else beside me notice that after Tesla reported their first quarter earnings, estimates for 2013 and 2014 fell? No, that wasn’t highly publicized. Why let the facts get in the way of a great story?

Photo Credit: fogcat5

  • David Laidig

    Any car company that does not build cars for the masses is doomed.

    • AlcoluJohn

      Yeah, I was just hangin’ ’round down at the corner Rolls-Royce dealership, scoping out the 2-for-1 specials on mass-produced Bentleys, when I thought, “Wait! For a truly mass-produced car from a non-doomed manufacturer, I need to bop over to the Ferrari dealership, and maybe I’ll check out the Lamborghini clearance sale at Ralph’s Used Cars. ‘Course, there’s always Porsche if I decide to get a million-selling econobox …”

      What I believe you meant to say, David, is “Any mediocre car company that does not build cars for the masses is doomed.” And that’s exactly what this article said, too. Tesla has no unique value proposition, and absent a compelling economy-of-scale, it’s up against formidable opposition from Nissan and (dare I say) the Chevy Volt — essentially identical technologies in slightly less-sexy wrappings.

  • are122

    I think Tesla would be a great around town vehicle but the price is way too high. Being a motorcycle fan I also looked into electric bikes. My problem with both is running out of juice unexpectedly. Cars are not perfect and people are not perfect in plans. You can’t hoof it for a gallon of gas or ask someone for a jump. You are basically stuck and a tow is your only option.

    • Nammie Bion

      o ferpittisakes, *so* many things can go wrong with any mode of transportation–why pick on ‘juice’? why not a flat tire? Or alternator? Alot of stuff that require a tow or a least a delay. So you deal. It doesn’t happen every day and you go on driving.

  • midair

    “This auto mobile thing is a fad…continue investing in buggy whips”……I mean really, who could compete on economies of scale with horse breeders….those auto’s just won’t be able to do it.

    • jack_sprat2

      You’re confusing “electric” with “Tesla”. The article effectively delineates the difference, so I’m left with two choices: either you’re too lazy to read the article closely or too dumb to understand it.

      • Kirk Kirkpatrick

        I don’t think @midair:disqus missed anything. Perhaps @jack_sprat2:disqus, you are mistaking your inability to understand for someone else’s.

        The are two forces at work here. The economic forces that propel a company to a higher stick price and the psychological ones. This article ignores the psychological force, a force that has power Gold prices for years.

        Good is mined at a rate over two to one of what is used worldwide for all uses of Gold. We have too much Gold. Way too much Gold. And when we have too much supply prices go….. up! That’s right, they go up. Why because people have “faith” in gold. And that faith has created a multi-year “bubble” in Gold. And it is not going to burst any time soon. In fact, in spite of the facts, most people reading this comment will refuse to believe it.

        The author made the classic mistake, He thinks investors and markets have some rationality component to them. They don’t. Investing is not Chemistry or Physics. Most investors just ACT like they are doing analysis but they are fooling themselves and they believe their “ideas”.

        ” Tesla’s decision to use an 85 killowatt-hour battery pack (the Leaf’s is 24 kW-h) has resulted in an electric car with greater range.”
        This statement is the equivalent of seeing a statement that says “Algebra does not work because you can’t add a letter to numbers.” If you read this statement and did not understand that the author of the statement is totally ignorant about this industry, you are an emotions investor, and you are in good company.

      • 1crappie2

        Nice objective critique. So pleased you had the dignity not to get personal or smarmy.

  • BulldogmomJ

    All of this re markets, competition and such may be true.
    However, when I first saw the Tesla Roadster, just last week, it took my breath away.

  • Westwoodman

    The one obvious problem with this analysis is found, stated boldly, near the end of the story.

    “Tesla’s decision to use an 85 killowatt-hour battery pack (the Leaf’s is 24 kW-h) has resulted in an electric car with greater range.”

    While price is certainly a factor, the fact remains that the single most telling issue with electric vehicles is range anxiety, something that Tesla has attacked head on. Maybe they aren’t there yet, but they’re working in that direction…something neither Nissan nor Chevrolet have done little to address.

    Also, I think another comparison might be apt. When VCR’s first appeared they were monstrous machines that typically sold for more than $1000 and had limited functions. The pundits uniformly announced that they would never become a product found in every home…too expensive, to little product support, and little desire to tape broadcast programming. Just before they were wiped out by the DVD systems, they sold at Best Buy for under $49. DVD players followed the same sequence and facing the same complaints and predictions of doom.

    Personally I’m betting Tesla is a smart company, and it’s not another Tucker or Delorean. I can’t speak to where the stock price should be right now, but the fact that lots of people keep trying to short it tells me it’s probably better than analysts think. Were I buying I might just put some money there. Musk has a habit of producing.

    • A_few_thoughts

      Cannot agree with your comparisons to products that use lots of microelectronics and are produced in far greater numbers. Electric cars, obviously, will advance but at no where near the rate of electronics. Motors, power trains, batteries, etc- fundamentally different things. I think Tesla will come down dramatically, I agree with other comments that entering the lower cost section of the market will be a real challenge for Tesla. The Chevy Volt has no issues with causing range anxiety. Thus Teslas are simply tools for the wealthy.

      • jeffhre

        “Printers will not go down in price. They are mechanical unlike processors and will not see the kinds of price drops as computers.” As stated to me by an electronics engineer as he purchased a ‘near letter quality’ pin driven printer for $400 in 1985.

  • Ole

    Reminds me of the World War One cavalry colonel who announced to his aide:
    “Aircraft will never have any real value in military operations!”
    “Why is that, colonel?”
    “Don’t you see? The engine noise is scaring the hell out of the horses!”

  • Bendgoat

    Oops…..I guess the article was wrong : )

  • disqus_ywnJjVhzOi

    I met a Tesla owner the other day, a complete stranger, and he invited me to come sit in his car while he described how amazingly cool the vehicle is and how he’ll be saving an estimated $8,000 in gasoline (he drives a lot) per year, which offsets the original price of the vehicle considerably.

    The author clearly fails to see that Mr. Musk has created an excellent car which happens to be electric. Its impact on the automotive world is only beginning to be felt. The Leaf is nice, buts it’s a toy compared to the Model S.

  • Seer Clearly

    Whoops… so why are so many selling here in Colorado?

    • Daryl Cobranchi

      Business model ≠ cars

  • Seer Clearly

    Despite the fact that technology to do what Tesla is doing has been around for nearly a decade, Tesla is the only one producing high-quality electric cars as their only product. The competition is selling only a tiny fraction of their production as electric – even the also-excellent Chevy Volt. To undersell Elon Musk’s gumption and technical prowess in this article and it’s relationship to his ongoing successes in business would be like poo-poohing Steve Job’s latest invention (like Microsoft’s Ballmer did with the iPhone and as a result doomed Microsoft to be a bit-player in the mobile market.) it’s easy to be a naysayer, much harder to applaud when something is simply right, even if many can’t see it.

  • Patrick Miller

    Who would ever need more than 640 kilobytes of RAM?

  • allan paull

    its now over 180

  • ranger

    One of these days it will occur to the states and feds that electric cars are getting a free ride. There is already some rumbling about this. When a way is developed to apply road tax to electricity, the stock value of Tesla will plummet. I personally resent paying for highways that are also used by electric cars.

  • lanzate

    Picking the top is always a near impossible task but Barry Randall was correct. Any stock that rises that high and that fast built on mostly hype is guaranteed to drop sometime. What will be interesting to see is if the stock sinks below where it was when this article was written. I don’t think Randall anticipated the near cult like status this stock would reach.

  • A_few_thoughts

    Huge bubble, there are only a limited number of customers for Tesla’s current products- as others have said Tesla faces a whole new world if they start competing with Nissan, GM, Ford, etc. Hybrids and electrics have a very long way to go, look at the sales numbers compared to gassers. You can hate the ICE and gasoline all you want but the competition for the others is brutal now that gassers are so much more efficient.

  • Eric Matterson

    Any time you spend more than 15% of your disposable income on a car, it’s too much. If a person can really afford expensive cars, then there is nothing more than purchasing them. But when you are struggling, financially, it makes no sense to have an expensive car and not be able to pay your bills on time.

  • johnmack

    “only a few electric car manufacturers have the economies of scale necessary to compete in the real, non-subsidized world.”
    Sorry, but the subsidized world IS the “real world”.
    If we held all companies to the standard of operating in the “non-subsidized world”, how many industries would we sell shares of? Defense industry? how about BANKING??? Oil and nuclear energy?
    Yeah, you can stop talking about the ‘real world’.

  • Michael Myers

    Tesla Model S – #1 selling new car in Norway.

  • Nayan Jyoti

    Price of stock has doubled in the 2 years since this article was written!