That’s the refrain I hear from countless analysts, investors and strategists when it comes to momentum or “story” stocks, where enthusiasm for where the company is going next overshadows the financial performance it can deliver now.
Dozens of stocks have been carried by the frenzy of lofty expectations, and then suffered the fall when that sentiment changes. So the question is, did Tuesday’s third-quarter earnings from Tesla Motors TSLA -7.53% prick a bubble in the electric carmaker’s shares, or is the stock just refueling for a continued run higher?
The stock plunged 14.8% to $150.65 Wednesday, but the bulls are opting to focus on the comments from Tesla chief Elon Musk, who said on Tuesday’s conference call that the company’s output of its Model S is “production constrained, not demand constrained.”
Jefferies analyst Elaine Kwei honed in on Musk’s remarks, noting that Tesla believes Panasonic will be able to meet the needs of an expanded agreement to supply battery cells. More important, Kwei writes in a report Wednesday, investors need to step back and look at the “tremendous milestones” the automaker has reached this year, including $2 billion in revenue over the last 12 months with Model S shipments picking up and a rise in gross margin from less than 10% to 20% and on target for 25% in Q4.
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“[W]e think we’re only scratching the surface of things to come,” Kwei writes, noting likely 2014 highlights included initial shipments to China, the final touches on the company’s Model X SUV and design work on the planned lower-cost model that many point to as a critical component of Tesla’s future.
But Tesla could very well continue improving from a bottom-line standpoint and lose its momentum as a hot stock. The divorce between fundamentals and the stock price that juiced shares on the way up can be just as prevalent on the way down.
Goldman Sachs analyst Patrick Achambault acknowledges many of the same points presented by Jefferies, but takes a more cautious stance and has a $104 price target to Kwei’s $210.
Even though Tesla’s Q3 shipments of 5,500 vehicles were shy of rising expectations, they still beat the company’s own forecast, Archambault notes, in what was the broad theme of the quarter. But remaining uncertainty around the real underlying demand for the company’s vehicles – masked by the lag in overseas deliveries and battery constraints – coupled with the sky-high growth expectations is what keeps Goldman wary.
Tesla is also facing something of a high-hurdle effect, not dissimilar to that experienced by the likes of Apple AAPL -1.62% and LinkedIn LNKD -4.22%, where beating its own guidance is not enough for Wall Street analysts who have modeled out considerably higher growth.
S&P Capital IQ’s Efraim Levy has a higher target price than Goldman, $140, but rates the stock a sell. “We view Tesla as a leader and innovator with strong growth prospects,” he writes, but “do not see a major potential near-term upside catalyst for shares.”
While the fundamental view seems to be more bullish than not, with concerns about valuation, chartwatchers are finally getting the retreat thy have been calling for.
“Tesla is a momentum stock with a real story to tell,” says Auerbach Grayson technical strategist Rich Ross, but that is a blessing and a curse.
Such stocks are “notoriously difficult to value” in a traditional fashion, he says, and there is a troubling pattern for traders falling back on technical indicators: a textbook Head and Shoulders top forming since August.
Ross thinks a break below $150 would trigger a drop to the $110 area. “If this stock closes below $150, it cannot be owned,” he suggests, and even above that he’s hesitant to predict the uptrend that had the stock as high as $194.50 on September 30 will resume in earnest.
“When it comes to high flyers like Tesla, I’m a big believer in the old adage, ‘Your first loss is your best loss,’” says Ross.
Even with Wednesday’s decline Tesla shares are up almost 350% this year.
Steve Schaefer, Forbes Staff