Tesla: Is The 'Bubble' About To Burst? Shorts Will Finally Be Rewarded

Aug.15.14 | About: Tesla Motors (TSLA)


TSLA at $310 a share would have a market cap of approximately $40 Billion.

TSLA's current stratospheric market cap requires a ride on one of Elon Musk's Space X flights to reach.

The rechargeable battery market is facing raw materials and environmental events that are likely to dramatically push up costs in the future.

I remember exactly where I was in the fall of 1999 when Henry Blodget pegged a target stock price of an internet start-up (really just a website URL) to 14 times projected future revenue. I was walking through the Oakland airport and everybody was glued to the TV's airing CNBC, and I mean everybody, from bartenders and passengers to little old ladies. I was shocked at such a brash and indefensible statement by Blodget (the company in question had no real business model or concept of how to monetize the operation) that I thought that it was time to liquidate all of my holdings. If I had only listened to myself at the time! Are we in a similar bubble with Tesla (NASDAQ: TSLA)?

Don't get me wrong, I love the company and the cars and maybe the current valuation might be valid in 2018 or 2019 but not at the current place of the company and automobile market. I have had a few good rides on the volatility of TSLA and rode the stock from $125 a share to $185 a share, but it was purely a momentum play. The Deutsche Bank's analyst target of $310 is pure vanity and brings up shades of the late nineties and the internet bubble. We can call it the "Green Bubble" where revenues generated by environmentally preferred companies operate and command an accelerated multiplier at anywhere from 3:1 to 20:1 depending on the political correctness of the buyer. Rod Lache from Deutsche Bank said the following:

"Tesla suggested that their growth trajectory will be much steeper, their mix will be much richer, and their costs will ultimately be much lower than we previously assumed," Rod Lache, the analyst, said today in a report, where he cited comments from Tesla's July 31 earnings call.

Lache raised his target price for the stock to $310 from $220. Next year Tesla may deliver 60,000 cars and 100,000 in 2016, 18 percent and 67 percent more, respectively, than he previously expected, said Lache, who also now rates Palo Alto, California-based Tesla a buy, up from a hold.

Even if the production projections and vehicle delivery estimates by Lache are close to accurate (a big if considering Tesla might have difficulty with capacity), it could not possibly justify his valuation or even the current stock price.

  • Current TSLA market cap of $32.5 billion is 10X revenue based on the latest quarter annualized. Industry leaders like Ford (NYSE:F) and GM are not even 1X revenue and they make a profit.
  • TSLA's 2014 Q2 Revenue of $770 million is an impressive growth number but profit margins are still flat when we should have seen a better net income number.
  • Environmental issues and raw materials sourcing are creeping up in the manufacturing of rechargeable batteries and could impact TSLA next year

One of the often ignored points with Hybrid and Electric vehicles is the apparent nullification of the carbon reduction impact in the overall vehicle "carbon" footprint. The press is starting to take a pragmatic look at the net effect of these vehicles on the environment to see if government subsidies make sense. A number of studies have come out in the past few years and the impact might be neutral at this point as the electric/hybrid vehicle manufacturing processes nullify the carbon savings from less fuel burned by combustible engines, see a typical article from the Wall Street Journal last year. This could be important for one of the significant public desires around purchasing electric vehicles is the desire to be environmentally sound. It might not be that sexy to own an expensive sports car that isn't all that environmentally sound and cannot compete with other gas powered speed machines, especially vehicles that won't benefit from a government subsidy.

The other environmental issue that is popping up surrounds the controversial mining of rare earth minerals used to produce re-chargeable batteries. At the moment, China mines and produces 90 percent of the rare earth minerals used in hybrid and electric vehicles. This monopoly could pose a significant risk to Tesla and other vehicle manufacturers using rechargeable battery technology. How long can the WTO compel China to do the right thing and not put quotas on the raw materials? It is quite possible that the environmentalists will become useful agents to China in establishing quotas to prevent devastating strip mining across the country. If this happens, the cost to produce these vehicles will dramatically increase and push out profitability for Tesla even further.

Conclusion: Tesla is a great company that Wall Street has dramatically overbought but has very dangerous volatility. No one wants to get trampled going short with momentum shifting the other way. I have been selling out of the money weekly puts with a 10-15 percent cushion with some success and will wait for sanity to return before going long.

Disclosure: The author is short TSLA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.