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The Curious Case Of TSLA Motors And Stock Valuation For "Cult" Companies

|Includes: Tesla Motors (TSLA)

It's funny how many investors can't (or don't want to) think for themselves - this is especially true for "cult" stocks: A herd following mentality builds - which is compounded by Wall St. analysts calling the stock in question a "momentum" stock. Also, many people seem to confuse short-term trading volatile stocks with (long-term) investing - even as stock prices and company fundamentals diverge. This growing diversion should ring a bell and at least remind investors to add a trailing stop loss limit.

Case in point: Tesla Motors. "Investors" bid up TSLA prices to above $130 until one Goldman Sachs (NYSE:GS) analyst yelled "fire" today (using discounted valuation) by "only" upgrading his blended TSLA price target to $84.

Details and assumptions for his three scenarios can be found in the chart below:

(Source: )

An author by the online handle "Logical Thought" (LT) came to similar conclusions in an article published a few days earlier on Seeking Alpha. LT even used a more modest discount rate of 15%, GS used 20%:

Summary: Even if everything goes smoothly for TSLA until 2018-2020 the stock "only" has a present value in the high double-digits according to both LT and GS.

I came to similar conclusions playing with numbers and wrote a few days ago:

"I'm now short $TSLA (for the first time) at 124. I think this company is great, but overvalued. I will go long again at $50-75."


"With all good news ($TSLA joining Nasdaq 100 index, good Q on July 22, more cars in 2013) and stock near $125, I don't see much upside left."

"Meaning the good news is out and already included in the stock price. $TSLA now with a market cap over 14bn (almost twice that of Fiat !)."

I wouldn't touch the stock above $75 (even that's very optimistic in my opinion), the lower range of $50-75 for TSLA sounds more reasonable after I juggled some numbers - again, assuming everything goes in Tesla's favor during the next few years and the competition of established auto giants is asleep at the wheel concerning pure EVs and/or plug-in hybrids.

This doesn't mean Tesla isn't a promising company, I just think the stock is quite overvalued on a fundamental basis at the moment.

In fact, I went long TLSA in late 2012 below $30 ($28 to be precise) and sold out above $60 and $70 in early May 2013.

More recently, however, I have been attacked by other people here on SA when I announced my first TSLA short position at $124.

(This behavior from longs is common for "cult" stocks". Instead of looking at raw numbers, people with different/negative opinions will get attacked.)

One should also keep in mind the particular differences of automotive companies compared to other high-growth sectors:

- Car companies rarely outsource final assembly (i.e. a car company can grow less quickly than a company in IT - such as AAPL with basically 100% outsourced assembly, enabling AAPL to ramp-up/order an additional XYZ million of iDevices within months. TSLA can't do it this quickly even if the additional car demand was there.)

- Cars are a very capital-intensive industry sector with very high initial investments and fix costs. There's a reason there were virtually no new entrants in the auto sector in industrialized countries for decades.

- Cars with a new propulsion system (especially long-range EVs such as the ones produced by TSLA in need of powerful batteries) require lot of additional cap ex. I will cover supply chain limitations (global battery supply limit in production capacity) in future articles in more detail.

- Cars are a low replacement and turn-over goods category (8-10 years usability for cars, this means the established competition can catch up in EV and hybrid vehicle development before many consumers replace their current car and could potentially opt for a TSLA.)

All stock bubbles will burst one day - it's not a matter of if but when they reverse to the mean. Even the greatest company with the most visionary executive team/CEO can be priced to perfection - and beyond that for some time.

This is especially the case for "cult" stocks like NFLX (in 2011 @300$), AAPL (in 2012 @ 700$) and now TSLA (in 2013 @ 130$) - to name just some prominent examples from the past three years.

All three remain great companies - but consider going long only when the prices are about 40-50% off the current highs, my potential entry points would be: AAPL at 350-400$, TSLA at $50-75 and no position for NFLX because of long-term threats from new entrants such as AMZN.

PS: In fact, I'm thinking about going short NFLX if it climbs back up to (or above) $300 again. However, like AMZN or LNKD, NFLX is a "teflon" stock with a very high P/E, so I will be patient before entering a short position. More on these three stocks (AMZN, LNKD and NFLX) in future Instablog entries.

Disclosure: I am short TSLA.