High valuation spells trouble for Tesla

Tesla’s earnings could be a key moment for a company that has seen its share price rocket over the past year.

Those adamant that a tech bubble is in progress need look no further than Tesla’s share price for confirmation of their theory. From $50 last year to a peak of $250, enthusiasm and speculation have driven the price to new heights.

The fall from the peak since March has been just as rapid, however, and now fans of the company will be looking to quarterly earnings for signs that the stratospheric rise was justified.

Tesla is a clear example of the old saying that a share price is not the company. Speculators have driven the price, in the expectation that they will be able to sell the shares on for more. Such minor details as earnings and fundamentals have gone out of the window in the dash to own Tesla stock, the latest ‘must-have’ company in any growth portfolio.

We are still waiting for sanity to prevail on Tesla – yes the trend is still up, but the stock price has detached from reality. A comparison with Daimler is instructive – on a profit of $12 billion, Daimler is valued at around $120 billion. Tesla made no money last year, but is still worth $25 billion. On a fundamental basis, the comparison is even more ridiculous; Tesla is trading on a forward PE of around 60, versus 11 for Daimler.

The stock market is a forward-looking vehicle – Tesla’s share price already assumes impressive sales growth, so just meeting estimates, or even coming in slightly ahead, is not enough. The company has to run faster and faster just to stay in the same place. To make matters worse, competition in the electric car market will only increase.

In the long run, Tesla may genuinely change the world in the way its founder wants it to. But over-eager investors leaping on the bandwagon should be aware that this is a company where a revolution in the world of electric cars is already taken for granted.

In the short term, we will all be looking out for a ramp up in production. Previous forecasts have indicated that 1000 cars a week will roll off the assembly line by the end of 2014. If that target looks to be slipping, investors should be worried. Even if it is met, analysts will want to know how the company plans to build on this from the beginning of 2015.

Other costs will begin to take effect too. Hitherto, Tesla has relied on its good name and the word of mouth of its own customers. Advertising has played only a small role. At some point, however, the company will need to step up its efforts in this regard. It is not a signal that we have seen a peak in demand for Tesla cars, but rather an extra cost that will eat into margins, reducing bottom-line earnings growth. This is a tricky time for a stock built on high expectations of future growth.

In the short term, the selling appears to have stopped, and the price is back above $200. Support has been found on the blue rising trendline, but upside gains have been capped by the descending red line. An immediate target would be $217, the April 21/22 high, and also the bottom end of the gap up created in February, and a retest of $217 would signal a break of the downtrend from the March highs.

Tesla chart

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