Time to Bail on Tesla Motors Inc?
You have to give it up for Elon Musk, the founder of Tesla Motors Inc (NASDAQ:TSLA), who continues to convince Wall Street and investors the company is a generational stock.
Unfortunately, I’m not in his camp and feel TSLA stock is overvalued.
Many will argue and point to the technological innovations occurring with the Tesla car. This is valid but I would argue the stock market valuation for TSLA stock is priced for perfection. While Tesla may have a leg-up compared to its competitors, my view is that the gap is closing and in time, Tesla will face a much more difficult operating environment.
We are seeing electric cars from many of the world’s automakers, including General Motors Company (NYSE:GM), Ford Inc (NYSE:F), and BMW.
Don’t get me wrong; I like the Tesla cars and they definitely better than their rivals at this time. However, I can’t ignore the excessive valuation assigned to TSLA stock.
Elon Musk may inevitably turn Tesla into a revenue- and profit-churning machine in the years ahead. The company may even become one of the top innovators out there. But for now, I’m not taking the bait.
My Bear Case Against Tesla
I have discussed Tesla stock numerous times in the past, citing its enormous valuation. The last two times I talked about Tesla, the stock was trading at $268.34 and $251.00 per share. TSLA stock traded at $218.00 per share intraday on Friday, posting a 19% decline.
Chart courtesy of www.StockCharts.com
Much of the recent excitement and optimism toward Tesla was driven by the massive demand for the yet to be produced “Model 3”—a more attractive price point versus the “Model S.” More than 300,000 people put down a $1,000 deposit to preorder the car.
Again great news for Tesla, but I can’t justify the valuation given the company has yet to roll out a Tesla Model 3 from its production line.
And based on the company’s past issues with production and the sourcing of top-quality specialized parts that simply can’t be purchased at the local auto parts supply retailer, I don’t think the road for the Model 3 will be that easy.
In a surprise move, Elon Musk decided to move up the hit production target to 500,000 cars by 2018, two years earlier than initially planned. Perhaps Musk is feeling the competition and feels the need to get more cars on the road. A good strategy but it will not be easy.
To achieve the 2018 target, Tesla is raising around $2.0 billion, including the sale of $1.46 billion of TSLA stock to a group of bankers at an average price of $215.00 per share. Note the price is below the $242.00 offering in the company’s last offering in August 2015, which offers up some red flags on the part of Wall Street and its willingness to pay.
My thesis hasn’t change for Tesla despite the share price decline. I still feel there TSLA stock is high-risk and it could fall back below $200.00 per share to its previous support of $180.00.
Even if Tesla retrenches back to $180.00, I’m not sure if I would be buyer of Tesla as an investment.
From a trader’s perspective, I may consider trading at below $180.00 via call options for a trade, but I would still not consider Tesla a buy-and-hold stock.