Tesla: Short Squeeze or Irrational Exuberance?

Image Source: www.teslamotors.com

Tesla Motors Inc. (TSLA) has rebounded 65+% since providing “disappointing” guidance last quarter followed by the fire scares and leaves this author wondering whether or not the stock is facing a short squeeze or investors are exhibiting some irrational exuberance.

At a Glance:

Symbol: US-TSLA
Price: $203.70
Market Cap: $24.97B
Yield: N/A
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Not a day goes buy without at least one bull and one bear article being written about Tesla.  Bears will bring up all sorts of valuation metrics – a P/E over 100 (vs. the 10-15 range that GM, Ford, and BMW sit); the market cap / car produced exceeding $1M (vs. BMW @ $28K/car, or  $5,300 for GM); a company priced for perfect execution of not just the Model S, but also the Model X AND the third-generation car expected to come out in 2017 and sell for $30-40K; upcoming competition in BWM’s i3 and i8 lineups.  Bulls will point to the company’s rule-breaking characteristics; being an innovator in the auto industry; the upcoming competitors (i3 and i8 included) that still show the old-school thinking of auto manufacturers and that they all fail miserably head-to-head when comparing electric capabilities; and that valuation metrics don’t matter for a company with so much potential and innovation.

Source: Google Finance

Source: Google Finance

I posted about my dilemma as an investor/gambler/shareholder back in October just before the Q3 earnings.  I ended up holding the stock and Tesla provided “poor” guidance and the stock dropped 20%, and then dropped 15% on potential fires.  It has since rebounded tremendously, possibly because of the continued short interest (still at 30% even today) but also as a result of several positive news since the earnings release:

While all this positive news certainly warrants an increase in share price, the company now has a $25B valuation and I always like to compare this relative to all the other car companies (despite arguments that Tesla is not another car company):

Company Market Cap Tesla %
Toyota (TM) $184.26B 13.6%
Daimler $97.65B 25.6%
Ford (F) $60.70B 41.2%
General Motors (GM) $57.73B 43.3%
Honda (HMC) $66.99B 37.3%
Fiat $12.90B 193.8%

Since my first post about this company,  it has always boggled my mind how much of a premium investors are willing to put on this company – and it was only $6B then.  Today, it is 4 times that size and I face the same dilemma as back in October.  However, there are two things that are now leaning me more towards being an investor:

1) As mentioned in a previous post, CEO Elon Musk’s incentive plan includes a target to obtain a market cap of $43.2B by 2022.  While there’s still $18B to go (and 9 years), if you do the math, at today’s levels, that works out to be a 6.5% annual return – something that could probably be achieved through safer and less volatile investments.  Now, $43.2B is just a target and the company could certainly surpass that, but let’s hope the company fundamentals start accelerating and closing the gap on today’s valuation.

2) The stock is hitting new highs today on what I hope is NOT what is making news today – a secret (shhhh!) meeting between Apple (APPL)’s head of mergers and acquisitions and Elon Musk.  Now, newspapers like to play up every little detail; and once one publisher posts, the others follow, but if this is solely the reason for today’s 2-3% rise, it starts making me wonder if buyers are now showing a little too much irrational exuberance in the company.  First off, this meeting occurred in February 2013 (yes, last year), and second of all, for all we know, these two could have just got together to share fantasy football tips.  Apple’s acquisitions typically have been quiet and small in nature (vs. Google) – and buying a $25B car company doesn’t seem like staying under the radar.  Of course, this has led to speculation that Ford (F) or GM (GM) would want to buy Tesla which has also lead some research in Elon’s tweets:

Elon Musk Tweet - 4-Jun-13

All eyes are on Tesla tomorrow after hours as it reports.  As this post describes, Tesla could well produce gross margins in excess of 25% (based on having to exceed 25% in order to average 25% in the quarter) which could continue sending the stock higher.  The company could also provide guidance that the investment community deems as poor  and send the stock tumbling again.  Having tried this twice and both turned out to be a waste of money, hoping the third time is a charm – will now be buying puts as insurance against a drop – just a decision on how much to spend ($200 strike = $9.50 / $190 strike = $5.50 / $180 strike = $2.80).

We’ll decide what to do with the options/shares after tomorrow’s call.  As a shareholder, still love the company and what it’s doing – but as an investor, the valuation and execution risk are extremely high at the moment.  I suspect I will be losing my shares by triggering the put (or selling if shares go even higher) soon after earnings – like I’ve said before, there will be lots of future opportunities to buy – it’s just a question of at what price and after how much of a drop.

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One thought on “Tesla: Short Squeeze or Irrational Exuberance?

  1. Pingback: Let’s Catch Up (for July 2014): Saying bye-bye to some favourites | Fearless Cal's Investment Journal

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