Snapshot of Tesla
Tesla (TSLA), currently priced in the high $160s is a leader in electric luxury cars. To date, compared to the other luxury auto companies, Tesla seemingly has an uncontested product in ability. For example, the Model S is able to travel around 250 miles on a single charge, whereas BMW's electric line travels around 150 miles. Adding to a great product, the company also has growing sales, which has increased by approximately 250% over the last 3 years. So, should you buy this automaker company that is clearly in its growth and expansion stage?
Andrea James, analyst at Dougherty & Co, is making the case that Tesla should be well in the $200s based on selling 500,000 vehicles per year. This analyst is completely out to lunch on Tesla.
Reasons why she is out to lunch and should stay there:
1) High volume low sales price
She uses the flawed logic of high volume low price point for sales. For example, she states that "IF" Tesla can sell 500,000 vehicles per year, which she bases on their current growth percentages, the company will be highly profitable and the stock should reflect this by being in the 200s. This is flawed because it does not take into consideration that most companies experience diminishing sales over time (the average car life is approximately 10 years). It is also overly optimistic in that it assumes that Tesla would be able to hit this high target. If you can get half a penny from 10% of the world every year, you would also be mega rich. This high volume target also leads into my other point. She also seemingly doesn't take into consideration the cost of revenue also.
2) Tesla will more than beat market share, it will be the entire market
The current total auto sales for 2012 is approximately 14,000,000 vehicles. Of this, only 2.8% of these vehicles are luxury cars. So, if we use her sales target of 500,000 vehicles per year, this ends up being 3% of the 14,000,000, which is 0.2% higher than the total market share of all mid ranged vehicles (BMW, Mercedes, Audi, Jaguar etc). Some companies were omitted from this, however the data clearly shows that only a maximum of 5% of total vehicles are mid level luxury brands. She also makes the $200 price target based on a 25% market share that Tesla could have. So, if we consider what she is saying, she is saying that Tesla is such an amazing company that it will have at least a 25% market share and based off this 25% market share, Tesla is actually worth $200 and anything under this is a great value.
I don't know where she got her data from, but from the data I've found, I'm sure you can see that there is a flaw here. The total market share of luxury vehicles in 2012 is only 2.8%. So, what she is really saying is, you should buy Tesla because it is such an amazing stock, that not only will it get a 25% market share, but it will completely wipe out its competitors in North America and outsell the entire market by 7%.
Other Analyst opinions from the video: Goldman Sachs (GS)
Goldman Sachs makes the projection that Tesla should be in the mid $80s per share. This forecast seems more reasonable, but it is still considerably high when you compare Tesla's balance sheet and cash flow to its closest competitors. Analysts also have a tendency to be wrong most of the time, which is discussed in this video by Tasty Trade's Tom Sosnoff. The fact is, Tesla is now trading in the high $160s range. In my opinion and others, this seems to be the effect of a cult-like following of the stock and a string of good news. This should make investors weary of a possible sharp drop in the short term due to its strongest support levels being around $40 per share.
Reasons to not buy Tesla at $160
1) No sight for the future
Tesla is in a growth phase right now. For example, Tesla is opening new charging stations all over the US in order to support their customers. On top of this, it is also ramping up the marketing of its products. This is evident through an increase in capital expenditures and also an increase in their cost of revenue. Opening new charging stations is great for their customer, however is it really a good thing for the company? No. These stations are operational assets, and while the land may increase in value, these stations over time will require maintenance costs, in which the company has not addressed how it will cover these recurring expenses. Not only will there be maintenance, but what about the free electricity their customers will receive every time they fill up? How will Tesla cover this cost? So it leads me to question, with diminishing sales, how will Tesla keep up with the increase in operation costs from these charging stations? It is because there is uncertainty that I would suggest not buying into Tesla , at least until there is more insight on the actual cost of operating these charging facilities.
2) Growing too fast
Tesla is expanding too fast. This is evident from the increase in capital expenditures, which increased by around 200% from $40,203,000 in 2010 to $239,228,000 in 2012. It is likely Tesla is opening up new dealerships and charging stations without the capital or sales to cover it. From their balance sheet, it also seems that the majority of their cash on hand is from financing activities. To me this is a very big red flag. This means Tesla is not able to cover the expenses from its sales. A healthy company uses its sales to cover the majority of their expenses. Growing too fast should be a big concern for investors because it could leave a company with a lot of debt/expenses and not enough sales to cover it. When this happens, this usually sends the company into bear mode as their value falls back down to more sustainable levels as support. For example, Tesla may have to close down operations or sell assets at a loss to minimize their expenses in order to survive.
3) The insiders don't think the stock is worth $160
There is a lot of insider trading happening. Currently there is an 18:1 sale to buy ratio at an average price of $140 per share by insiders. The most recent instance is on August 29, 2013 where a sale of 60,000 shares was sold in the range of $163-$165 by one of the directors. Clearly the insiders do not think it is currently worth this price, and this should be another red flag. Insiders are the people who know the company best and also have the best understanding of where the company is heading. For these people to be selling the stock at these price levels, clearly there is something wrong.
How to profit on Tesla
When should you buy Tesla? Your guess is as good as mine. With the lack of information available on actual costs of operations, such as the cost to operate a charging station, giving you a price target would be very much like being in a dark room and throwing a dart at a wall full of prices. What I can offer is how to profit on Tesla . At any level in the $160s I would consider shorting it or buying long put options on it. I am more inclined to use put options on it because it lacks the risk of the shares being called in. It also allows you to use a smaller percentage of your portfolio, which will limit your overall exposure to risk.
Trading stocks is like a game of Jenga. Every block added is one position added and every block taken out is one position removed. When the base becomes unstable, the tower begins to sway back and forth, much like the volatility of a stock. Once the swaying of the tower reaches a maximum of its horizontal sway, the tower will collapse at its lowest and strongest support level. So in the case of Tesla, from a purely technical view, the chart is showing the majority of the support lying in the $35-$40 range and some small levels of support in the $100s. Tesla is looking much like a Jenga tower preparing for a collapse. It is only a matter of when and at what catalyst. Consider buying puts, or if you're bullish on the stock, sell put options on it at a price target near one of the support levels.