Tesla: Risk and valuation

Last week Tesla turned in very respectable Q3 earnings and revenue figures but nonetheless got hammered, tumbling around 20 percent after already having a difficult October in which shares dropped 17 percent, its worst month on record.

So what gives? For a long time, critics have argued that Tesla is way overvalued. The stock has had an incredible run, moving north over 600 percent from around 30 bucks a year ago to its 52 week high of $194.50. Even Tesla founder Elon Musk acknowledged recently that “the stock price that we have is more than we have any right to deserve.” And in September Musk noted that while he didn’t think shorting Tesla was a good idea, it was “not as crazy” an idea as he felt it it once was.

So to be fair, a pullback was inevitable. And after all the carnage the company is still trading at about 80 times 2014 analyst earnings estimates, which is a very healthy valuation even for a high growth company like Tesla. There are roughly 21 million shares of the company that investors are shorting as of October 15, or about 17 percent of the float.

Despite Tesla’s very healthy valuation, I still would not short Tesla.

I spent a couple years doing research for a  research firm that caters to Wall Street asset managers who routinely short companies. There were a couple takeaways from that experience.

1) Only short companies that are not fundamentally sound.

2) Betting against a solid company that’s overvalued requires precision timing, which involves high risk and extreme patience (a hefty margin account). And you can still lose.

3) If you’re going to short a company, you must have an even temperament, total conviction, and the resources and willingness to wait what can be many years to be proven right.

Everyone knew that Amazon and Netflix were overvalued at their peak. But they were still great companies with great management and great products. I believe the same to be true of Tesla. Yes, you could have shorted any of these companies and made money, as has been proven in the last week and was proven when the bubble burst on both Amazon and Netflix. But that’s a very high risk gamble.

Most investors I speak to confess that getting shorts right is much harder than longs, if for the basic statistical reason that, on average, the overall index moves up each year. I recall researching Palm back in 2009 and advising asset managers. Our conclusions were that the product itself was problematic. The memory was limited, the app ecosystem poor, developers were deserting the WebOS platform. Those are great reasons to short a company and those who shorted the company made the right call, none of which had anything to do with valuation.

So forgetting the whims of Wall Street for a moment, let’s ask the fundamental question: Is Tesla, the company, fundamentally sound? From my perspective, it’s more than just sound. It remains focused with a very strong design and marketing oriented culture that will continue to produce great products, one of the reasons the company has snapped up ex-Apple talent.

Last December I wrote that the two biggest risks to the company were a significant supplier problem or a recall. The recall question is buzzing in everyone’s minds right now after 3 Model S accidents have involved fires. It’s lead to a call from Center for Auto Safety Head Clarence Ditlow for an NHTSA investigation as well as a report that NHTSA will send a team of investigators to review a charred Model S in Tennessee.

No one has been injured and Musk took to the Tesla blog to remind everyone that there are 150,000 car fires a year. It’s difficult to know what the NHTSA may or may not do, but the risk here revolves around customer perception (branding) and some marginal costs should Tesla have to defend potential lawsuits, something which every major automotive maker ends up having to do. It should be noted that Tesla achieved the best safety test score in NHTSA’s history.

A serious recall, say where Tesla had to reinforce the armor underneath the car, would be costly in terms of image and current production disruptions. But one has to weigh this small possibility against the reality that the company continues to produce next generation vehicles and has extraordinary relationships with its customers, so much so that the driver in the Tennessee crash immediately said he’d buy another Model S.

So as Tesla’s valuation comes back to earth, and headlines create jitters on Wall Street, for the smart investor who believes the company is fundamentally sound, now is actually a time to buy.





Tesla’s latest Model S software update gets better sleep mode, Wi-Fi access

Electric car company Tesla (s TSLA) has quietly released the latest over-the-air firmware (5.0) update for the Model S, reports Autoblog Green, and it comes with a better sleep mode, as well as other enhancements like the ability for the car to connect with Wi-Fi networks.

Trademark trolls block China plans for Tesla Motors

Tesla might face the same problem that Apple did when it wanted to enter China: trademark trolls. According to Want China Times, Tesla’s trademark has already been registered by a couple of trademark squatters who are asking high prices.