Since we published our very first piece on Tesla (TSLA) after the close of the market last Friday, TSLA has moved down $18.90 or 10.3%. The article generated much debate and comments on Seeking Alpha.com, Wall Street and Main Street. We expect to continue to see stock decline over the next few weeks especially in light of the stock breaking through its 50-day moving average. This stock has caught the attention of the investing public because it's the first new car company that is really a technology stock because of its patents and that fact is possibly the real value of the company. See "Tesla Stock Price May Be Out Of Gas."
Tesla Motors timed the introduction of their vehicles to a market that was ready for innovation both in styling and in sustainability. The company's name and marketing created a trend among the affluent that could afford the vehicle's high price to show their concern for the environment and willingness to promote new technologies. The hype allowed the stock to rise 416 percent since its initial offering in 2010! However, many investors now wonder if other vehicles may be ready to take up the banner of environmental consciousness with new designs and lower prices.
The company's apparent success story is complicated and full of governmental intervention. Tesla started out in Palo Alto, California with a Silicon Valley engineering team. The vagaries of the automobile manufacturing industry immediately began to hamper the fledging company, but the company was bolstered by government loans from the Bush era Advanced Technology Vehicle Manufacturing program. Tesla has been something of a trendsetter over the past few years, with aggressive marketing strategies and an ability to read the current zeitgeist of the culture. Their X and S models became a status symbol in a number of markets. The early introduction of the Tesla Roadster, snubbed as something of a "kit" car, had an inauspicious start, but quickly recovered with additional models, the X model and the S model, which provides a smooth ride and reliable operation.
CEO Elon Musk has instituted some innovative marketing efforts for his brand that have paid off in increased revenues and enviable stock increases. Musk is on the cutting edge of new technology and he is able to bring the technology to fruition. He provided the concept for SolarCity (SCTY), which designs, leases and installs solar cell systems.
The high price of the vehicles, up to $120,000, is offset by a $7,000 federal tax credit and often, state tax credits as well. However, the reliance on government funding and various tax credits to sustain sales makes us wonder if Tesla can manage to sustain itself without these cushions. We wonder whether the business model itself is dependent on the ability to call on tax credits and "zero emission credits" to sustain interest. Even though the Gen III model is set to price at $45,000, it may be that Tesla vehicles will not garner enough consumer interest to increase revenues and market capitalization over the longer run.
Conclusion - A Time To Harvest Profits
We believe the company stock is fully valued now and that there is a time to sow and a time to harvest. Now may be the time to harvest.
The future of the stock price hinges on the company's ability to achieve higher revenue goals to provide the market capitalization it needs to keep increasing the stock price. However, a number of factors indicate that the new Gen III, priced at $45,000, will not be able to meet this goal. Indeed, competition from other electric vehicles, both currently available and in the pipeline, will make the goal virtually impossible to meet. The Chevy (GM) Volt, the Nissan (NSANY) Leaf, Ford (F) Focus, Honda (HMC) Fit and Toyota (TM) Rav4 electric models provide alternatives for price-conscious consumers that may translate to lower expectations for the new Tesla model.
Current economic conditions may also play a part in Tesla's diminished expectations. The economy continues to grow at a slow pace, tax burdens are higher for some upper income tax payers and the promise of leaner times ahead may cause consumers to put the brakes on spending in the coming months, with automobile purchases being put off until political conditions stabilize. If the growth of the economy accelerates and consumer confidence increases, TSLA could benefit significantly.
Given the facts behind the Tesla story as well as the prospects for the future should give investors reasons to pause and reflect. If you own Tesla common stock now, it may be time to sell a portion of your holdings and buy a Tesla car like we suggested last Friday in our original article. Those investors who are set on owning the stock should wait for one of the downturns that are likely to occur in coming weeks or months to purchase TSLA at a more advantageous price.