Tesla Motors, Inc. (TSLA) just reported earnings and blew away expectations. First quarter EPS of $0.12 beat estimates by $0.08. Revenue of $562 million was up 16% year over year and beat estimates by $63 million. You can read the transcript here. This induced a massive short squeeze driving the stock up nearly 47% for the week and 100% for the month. See chart provided by CNBC below.
The stock has gone parabolic as short sellers scramble to cover. The problem is there aren't any shares for sale. 50% of the float is tied up. The CEO and founder Elon Musk holds 24% of the shares outstanding while another 24% of the float is still short. See chart below depicting parabolic move.
The highlights of the call are very impressive, yet I would caution investors from jumping into the stock at these levels. In the following section I will lay out my bear case for the stock.
Stock Has Gone Parabolic
A parabolic buying trend occurs when a stock experiences a swift price upsurge such as the case in Tesla. The speedy escalation is characterized by greed and jubilation. Investors are mesmerized by prices increasing so rapidly in a short time. The greed is rampant and contagious, driving more investors to pile in. Those left out hear of the gains and throw more money into the stock hoping to make a fast profit, exacerbating the issue. Nevertheless, the parabolic move is unsustainable and inevitably breaks down. When the party is over, it's not unusual to see a stock lose the entire gain just as quickly.
As noted above, the stock has gone parabolic. Now there are parabolic moves and then there are extreme parabolic moves. This was an extreme parabolic move brought on by the scarcity of shares available for short sellers to buy to cover. Yet, the stock has begun to roll over Tuesday most likely due to the irrational exuberance wearing off. Investors may be realizing Tesla's stock has gotten way ahead of Tesla's fundamentals.
Priced For Perfection
The stock is priced to perfection at this point. With so much good news coming out in rapid succession, the valuation has gotten way ahead of itself. The recent burst in share price puts Tesla's at nearly 80 times 2014 earnings estimates. Buying the stock at this level means you expect Tesla to fire on all cylinders for many years to come. As we have seen with many high fliers, if the company announces anything out of order or has one hiccup at all the shares could take a huge hit to the downside.
Tesla Needs To Fund Its Expansion
This is the one thing I posit many investors are not taking into consideration regarding the stock. If Tesla is going to achieve the enormous growth projected by the current share price, the company will to need to raise funds to support the expansion. This can be done in a couple of different ways. Either incur more debt or have a secondary offering of stock.
I posit the company will announce a secondary offering. This sort of secondary public offering is a way for a company to finance growth. The increase in outstanding stock dilutes the value of current shares. The stock almost always takes a nosedive on any announcement of a secondary offering.
The Bottom Line
Tesla's parabolic spike was based on technical issues regarding the availability of stock. It has definitely been a short sellers nightmare. Yet, the same thing can occur to the downside when a secondary offering is announced. It appears the stock begun to roll over Tuesday already.
With the stock making an extremely parabolic move and the valuation now priced to perfection, a secondary offering to finance the necessary growth is exactly what the company needs and could be just the thing to bring the stock back down to earth. I would be very cautious until we hear how Tesla plans on financing the enormous growth projected for the company.