General Motors (GM) just curbed Tesla's (TSLA) momentum with an announcement that it would cut the price of the Chevy Volt. The news came just a day after Barron's said Tesla shares could be worth half their recent price, due to hurdles in getting a lower priced model to market.
General Motors will be offering a $4000 incentive for buyers of its 2013 Chevy Volt model and $5000 to buyers of the 2012 version, according to news reported today. With the competitive threshold thus raised for the new automaker, Tesla shares were immediately impacted with a gap open lower Tuesday. The stock was down 4% deep into the trading day. That followed TSLA's drop of 1.9% on Monday, after Barron's published a high profile report on the company questioning its valuation.
The onslaught seems to have curbed Tesla's Momentum. As you can see by the chart above, TSLA has enjoyed a sharp run higher as the company produced its first profit last quarter. The Elon Musk driven vehicle maker with the iconic name of the man who promised to find free energy has a special appeal to momentum seeking investors. That is because of its leader and his vision. Musk, of course, has a fan following of his own, because of his war on the establishment through disruptive innovation, heading visionary firms like Paypal, SpaceX, SolarCity (SCTY) and Tesla Motors . There is a certain energy about him that has not been seen since, dare I say, Apple's (AAPL) Steve Jobs. Such "energy" can add to a company's price multiple, and perhaps has extended Tesla's P/E.
Still, Tesla appears to be coming to market at the right time, with infrastructure being built out now for electric car recharging. Also, Tesla's Model S has a relatively attractive travel range of +200 miles before requiring recharging. It has won a good many accolades as well, and was even named Automobile Magazine's Automobile of the Year for 2013. Consumer Reports called it the best car it ever tested!
However, the stock trades at about 93X the analysts' average EPS estimate of $1.04 for fiscal 2014 (Dec.). Analysts see average annual growth of 33% over the next five years. Thus, the stock has a PEG ratio on that forward earnings figure of 2.8X. Valuation multiples can get big for fast growing companies, but I think this one has some fluff to it that is vulnerable to trimming near-term. Also, let's not forget that Tesla is not the first to market, and has serious competition to fend off from the establishment in Ford (F), GM , Toyota (TM), Honda (HMC), Nissan (NSANY.OB) and Daimler (DDAIF.PK).
Plus, Tesla is on Ford and GM's radar now, and the bar has just been raised by General Motors. Musk and company have been targeting the rollout of a cheaper model to more completely compete. The Model S costs more than $90K, and so has a limited appeal. GM's Chevy unit just rolled out its first all-electric car, the Spark EV, at a price tag of $20K.
Obviously, Tesla can make a lower priced model, though it may have to compromise on range. Tesla will offer luxury at its lower price, and not get as cheap as the Spark EV, at least not yet. It is a risky and surely foolhardy endeavor to bet against Elon Musk over the long-term, but betting against Tesla over the short-term is a completely different endeavor. It appears the latest onslaught of criticism about the company's valuation, and intensifying competitive awareness and action should curb the stock's momentum here and drive some fast money out of the stock. TSLA is not going to fall to a PEG ratio of 1.0X, obviously, but 2.5X is easy to see and 2.0X is not out of the question if the company hits a stumbling block. An $85.80 price (PEG of 2.5X) represents 10.5% downside, though the stock was there just a month ago, despite rising from $55 just a few days before that. So while I'm long Musk long-term, I'm suggesting the sale of TSLA short-term.