When the CEO says his company is overvalued, it's overvalued. Tesla Motors (NASDAQ:TSLA) CEO Elon Musk tried to call a halt to the Musk-mania yesterday stating the stock is going too high for the second time in three months. (He also warned in August.)
So far investors aren't listening to him. The shares were up another $3.66/share, a move of 2.5%, in early trade Friday.
The problem is that momentum traders don't listen. They see something going up, they keep piling in, until everyone's in the pool and the stock can't go down any further. Warnings like those of Musk have the perverse effect of enhancing such a mania, creating a "wall of worry" for bulls to lean against.
How you deal with this depends on the kind of stock owner you are. Traders may continue getting profits out of Tesla for some time, but they must be warned that, when the fall comes, it will be sharp and sudden. Careful attention must be paid to small technical moves, to any move regarding momentum, or you'll lose your gains in a heartbeat.
For investors who may have bought their shares in the first quarter of this year, when the price was less than one-third what it is now, the situation is different. You can sell less than a third of your present stake and have all your investment out of the stock.
While the company may not be worth today's $20 billion, it may well be worth yesterday's $5 billion. Sales have been doubling every year. Gross profit is 25%. These are unheard of for a mass manufacturer. You're betting that Tesla can indeed use robotic manufacturing technology and scale to bring the company into lower price points, and get ancillary gains through the battery business. These are not unreasonable assumptions.
But I wouldn't pay 50 times sales for that, which is what you're presently paying. On a fundamental basis, Tesla is in a bubble. Those who believe in fundamentals can take their profit and wait for the bubble to pop - although they may risk some remaining momentum gains - or take out their initial investment and know that, even after the bubble pops, they're in the clear.
It's a nice problem to have.
Right now, the company's option chain indicates the momentum investor still has some time. There are a lot more options outstanding that bet on a rising stock price right now than on a falling one. If you have a stiff appetite for risk, if you like the action and like to play momentum, if you're an active trader who enjoys sitting by a screen all day, be my guest. You too may make some more money here.
But the bubble will pop, and everyone involved in the stock should know that. If Elon Musk knows, you should too.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.