Seeking Alpha
Long/short equity, contrarian, special situations, wild cards
Profile| Send Message|
( followers)  

Not quite yet - but we're getting closer.

Catalyzed by pedestrian earnings that lacked Q4 guidance and other reports of its vehicles catching fire, Tesla (NASDAQ:TSLA) stock has been roped in over the last couple of weeks. Tesla is now trading 26% lower than it was 3 months ago, but is still showing 250%+ gains for YTD 2013 and the last 12 months.


(Click to enlarge)

Seeking Alpha made note of a StreetInsider article published this morning that pinned two analysts - one from Deutsche Bank and the other from Bank of America (NYSE:BAC), against each other:

Deutsche Bank analyst Dan Galves said the stock is now discounting pre-Gen 3 earnings and the sell-off creates a favorable entry point. "We are reiterating our Buy recommendation on Tesla as we see a series of positive catalysts over the next several months that could lead to renewed confidence in the company's earnings trajectory. These include: 1) A favorable resolution of the NHTSA investigation; 2) Initial news on (what we believe will be very strong) China order flows; 3) Increased visibility on an accelerating order/production ramp, and; 4) Further gross margin improvement and operating expense leverage (which may be significantly better than consensus). The firm maintained a Buy rating and price target of $200.

Meanwhile BofA analyst John Lovallo said shares remain overvalued even after the sell-off. He reiterated and Underperform rating and $45 price target, suggesting 63% from current levels. He said the company would have to sell 348,000 vehicles year by 2020 to justify the current valuation.

The bull makes some good points, but the NHTSA investigation, although likely to produce little that is detrimental, still remains outstanding and needs to be considered. I also think the bull fails to take into account the capex that's going to be necessary for Tesla to take its battery production operation to the next level; and how that's likely to affect margins. Putting a $200 price target on the stock is about as sensational as putting a $45 price target on it.

What John Lovallo doesn't understand is that you cannot price Tesla through traditional valuation methods, due to the potential disruptive nature of its business that could revolutionize the entire car industry. That factor has to be priced in slightly, and that's going to give the company an inflated P/E.

What will result of the probe could be something, but will likely be little to nothing. As I said in my last article, the NHTSA has investigated fires in other electric cars, with resolutions like GM voluntarily reinforcing the battery pack on its Volt. While a total recall is still probably unlikely for Tesla, measures such as reinforcing the battery pack seem prudent and logical, if necessary, to appease the NHTSA and continue forward with business as usual.

As with your other "momo" stocks, Tesla is not only susceptible to the results of this potential probe and its fundamentals, but is also susceptible to macro market corrections, as well. Big P/E companies are usually the first ones to pull back in a sector-wide or market-wide correction. Tesla's valuation is still one of a company that needs to grow extraordinarily quickly.

Should the same trading pattern continue, I'm going to stick to my previously mentioned tactic for reentry in Tesla. I like that the stock's RSI is riding the 30 line, but I'd love to see the stock dip down and bounce off the DMA and/or hit the $110 or below region before reentering. Again, you have to remember, Tesla is not a stock that you can simply do a market value QA for a wait for that price point - it's simply never going to happen, due to the nature of Tesla's business.

The market has already decided that Tesla is either going to be a delicious success story or will go up in flames quicker than a lithium ion battery - the future is in the hands of Elon Musk. In the poker nature of playing the man, and not playing the hand, I'm betting long term that Tesla does extremely well and is a household name 10-20 years from now. From a long-term standpoint, I'm still extremely bullish on the company, but I'll "wait for my pitch" before reentering.

I'm reaffirming reentry in the $110 or lower region. Best of luck to all Tesla bulls.

Source: Time To Pull The Trigger On A Tesla Trade?