The high-octane rise of Tesla Motors seems to have lost a bit of momentum after the electric car makers latest earnings call. While some expected Tesla to be a superhero stock, their expectations were reined in when TSLA reported lower than expected Model S deliveries, along with a tepid Q4 outlook.
Even with the announcement of a third quarter performance where margins continued to narrow, revenue expanded ($603 million vs $50 million last year) and earnings (excluding items) came in one cent above analyst estimates, Musk and Company were unable to convince the market that TSLA shares were priced correctly.
This is what makes the market so vexing….an improving revenue stream along with slimmer margins should be a path to new highs, but when looking at the fundamentals of the stock, some holes begin to emerge. Most notably, its outlook going forward.
The single biggest factor in the shrinking share price is that Tesla themselves warned of softer revenue and lower than expected Model S deliveries during the fourth quarter. Stock tend to be forward looking (as a rule of thumb, think 4-6 months), so this is a case of investors getting ahead of themselves. Since analysts thought Tesla was killing it on Model S sales, triggering financial herd mentality, the stock price skyrocketed over the past few months with little resistance.
But a sober outlook can be devastating on a growth stock like TSLA. In this case, bad enough to take more than 20% off of the stock in two days, a massive drop in value for a company that needs to make certain that capitalization stays at high levels as it searches for profitablity.
Fortunately, some signs point to a tough, yet winnable battle for the automaker. Elon Musk mentoned during the call that they are noticing extremely strong demand throughout the United States and Europe, but must now deal with production constraints that keep those cars from reaching their buyers. He is looking to remedy this lack of supply by boosting R&D by 25% in Q4 to offset lower sales forecasts, and enhancing its Model S and upcoming Model X SUV. Not only that, Tesla is also increasing its network of stores, service centers and supercharging stations.
All of this, if undertaken in the correct manner, should translate into a much stronger company going forward.
The market can be a cruel mistress at times, but it also notices things that others may not. Tesla was red-hot, but mostly for “potential.” Now that we see it cannot sustain such a rapid share jump, we can more accurately price the stock. But until we get a profitable company with a huge distribution network and a stable of different car types, the ability to gauge Tesla’s proper share price will continue to be a tall order.
Until then, the carmaker will have to deal with big swings, but if any company can handle such a large level of volatility, it is the brave and forward-thinking Tesla Motors Inc.