Why Tesla's (NASDAQ: TSLA) Stock is Going Down
Back in May, I issued a straightforward warning to Wealth Daily readers that Tesla Inc. (NASDAQ: TSLA) was going to crash.
I won't repeat the entire argument here, but here's the crux of it:
For the speculators, it’s definitely been a nice ride, but now that Tesla is about to be all grown up, the numbers will have to speak for themselves. It's not that the company is going to completely fail, but there's little doubt it will fail to meet expectations.
And when that happens, Tesla's share price will come crashing back down to Earth
As was to be expected, I got plenty of hate from the Tesla fan club for offering my bearish thoughts on the electric car company at the time. Many unbridled optimists got up in arms and threw out their best defenses at me, most of which have only confirmed how irrational much of Tesla's shareholder base has become.
Cries from the Cult
Since making my bear case on Tesla clear, I've borne witness to many ridiculous claims from Tesla bulls. Bewilderingly, I've been told that the company's sales trajectory doesn't matter. I've been personally guilted for not supporting such a righteous cause. I was even accused of trying to manipulate the market to favor my imagined short position.
Anyone with a basic understanding of market fundamentals knows these arguments are completely bunk. Sales obviously matter. If free market participants don't want what you're selling, it isn't actually righteous. A single writer can't shift sentiment on a $60 billion company.
Still, I don't blame these retail investors for being misinformed and misled. Tesla is a marketing machine, and it's done an incredible job of selling its lofty, albeit unrealistic, ambitions to the masses. People want to believe they're part of something world changing, and Elon Musk knows exactly how to take advantage of that do-good feeling.
At some point, though, the exuberance was/is bound to come back down to Earth. Like the morning after a first date, the makeup comes off and the bad breath comes out. Tesla might look like Gal Gadot when you're drunk off greed, sanctimony, and ambition, but when the beer goggles come off you realize it's just Bruce Jenner wearing a wig.
The Morning After
This week, Tesla investors began their metaphorical walk of shame when Musk revealed that the company is “two weeks ahead of schedule” for the launch of the much-anticipated Model 3.
It sounds like good news at first glance, and if you were following mainstream outlets leading up to the announcement, you'd have probably thought Tesla shares would have taken off.
But over the last few days of trading, Tesla's shares have plummeted from $384 to as low as $310 in just a few short days. This left many of Tesla's cheerleaders completely befuddled and an army of shorts not too shy to say, “I told you so.”
Yet even after shedding ~$13 billion in valuation, it's probably safe to say that Tesla is still immensely overvalued. At $47 billion, the company is sandwiched between Ford (NYSE: F) and General Motors (NYSE: GM), making it one of the most valuable automakers in the world, despite producing just 4.5% of Ford's sales at a substantial loss.
If the fundamental numbers aren't enough, Tesla's investors should take note that the company is losing its most valuable weapon: positive press.
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Hype is Fickle, Reality is Unforgiving
For years, Tesla has been celebrated by the mainstream, but now that it's all grown up, the critics are coming out of the woodwork. Think of what happened to Tim Tebow's prospects after his first NFL season. It wasn't pretty.
Evidence that the press is turning on Tesla is quickly mounting, with the news cycle no longer focused on what could be, but instead what is actually happening in the here and now. For Tesla this week, that's not been a pretty picture.
For one, the company delivered several thousand fewer cars than expected in the second quarter due to a production bottleneck. Jointly, the Insurance Institute for Highway Safety (IIHS) released less-than-stellar collision test results for Tesla's Model S, ranking it “acceptable” but below its peers.
Worst of all, Tesla is experiencing rapidly deteriorating sentiment from institutional players. On Wednesday morning, Goldman Sachs lowered its price target on the stock to $180. For perspective, the company is trading at ~$310 today.
Average targets ($284) are now below current share prices, even after this week's crash. Cowen Group has the lowest target at $155. Meanwhile, just a few weeks ago, Ron Baron was calling for an eye-rolling one-year target of $600 a share.
It should go without saying that the downside on Tesla right now is enormous, even after its 13% collapse this week. Even if the stars align perfectly, Tesla's shareholders are looking at a fairly valued auto company a decade or two down the line.
Forget Tesla: Buy This Instead
The thing about stocks that are built on hype like Tesla is that there's no foundation to keep them from crumbling. Once the incredible story fails to materialize, shares come crashing down, and fast.
If you're speculating on a small-cap venture, this kind of volatility is par for the course. When you're trying to invest in a major auto manufacturer, though, it's not a risk any investor should be willing to accept, simply because the upside isn't there.
None of this means Tesla is necessarily a bad company, but it's absolutely to say it's a bad stock. If you're excited about alternative energy and are willing to take risks in the sector in exchange for high reward, Tesla isn't where you should be looking.
Instead, you'll want to find companies that are smaller, with higher growth potential and the most advanced technology in development. Contrary to popular belief, Tesla doesn't have the best alternative energy technology at its disposal. In fact, it's not even close.
If you're speculating on renewable energy tech, there are much better stock stories you need to follow. I can't give you all of them today, but this tiny company is an incredibly promising place to start.
Until next time,
Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and The Cutting Edge. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.
Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.
Outside the office Jason is a lover of science fiction and the outdoors, and an amateur squash player at best. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.
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