Tesla (TSLA) is down about 30% since Oct. 1 after rough Tesla earnings. And this week we got news of the third fire to strike a Tesla Model S sedan after a traffic accident, stoking safety concerns about the roughly 19,000 TSLA electric vehicles on roadways around the world.
But despite the negativity, is TSLA stock a buy on a pullback?
Perhaps. Though I’m not buying Tesla right now, I think the electric vehicle manufacturer could be a serious bargain under $120 a share.
Why? Because the only real problems TSLA has right now is sentiment and Wall Street expectations. The business is booming, the future is bright and this electric vehicle manufacturer is here to stay.
TSLA Still Up 300% YTD
Tesla stock certainly isn’t done for, with more than 300% gains in 2013 even after the declines. Those profits are proof positive that TSLA is riding a longer-term story of great success.
Keeping expectations realistic is a challenge, but a good challenge for a successful company. And it’s important to remember that sentiment on Wall Street is not a real threat to the underlying electric vehicle business at TSLA.
Click to EnlargeBroadly, the hybrid and electric vehicle market now represents 4% of U.S. auto sales — and it’s growing. And while Tesla is getting all the press, EVs are growing like mad across all manufacturers — including the Prius Plug In from Toyota (TM), the Chevy Volt from General Motors (GM), the Focus EV from Ford (F) and the Leaf from Nissan (NSANY). As a group, the market is approaching 75,000 vehicles this calendar year – about double the electric vehicles sold in 2012 (h/t @Nemo_incognito).
Global expansion is underway, with the Tesla Model S now on European roadways and the first electric cars to be delivered in China early next year.
And in the longer term, Tesla is developing the mid-sized Model E sedan to compete with lower-price offerings from its competitors as well as a Model X all-wheel-drive SUV.
This is a rapidly growing market, and TSLA is the leading brand among consumers and investors alike.
It’s no wonder why, either, considering the Tesla Model S sedan got the highest-ever rating from Consumer Reports because of its high quality as well as the highest possible safety rating from National Highway Traffic Safety Administration regulators.
So while sentiment has shifted, the underlying business has not.
Maybe that’s why Tesla CEO Elon Musk recently admitted that TSLA stock is overvalued … even though he has tremendous faith in the company itself.
And judging by the sell-off recently, Elon Musk would be right.
Should You Buy Telsa Stock?
The real question, then, for investors is whether Tesla stock is a good investment at the current price.
And while I’m tempted to buy, I believe the shifting sentiment will continue to weigh on TSLA — so I’m not buying yet.
Recently, Baird issued a TSLA downgrade that spoke to unrealistic investor expectations. In their downgrade of Tesla stock, Baird analysts wrote that “solid execution” was already priced into the stock. In essence, they thought TSLA really only had downside risk because nearly flawless performance going forward was necessary, and it’s almost impossible to exceed such sky-high expectations.
That’s exactly what happened what happened with TSLA earnings, when the company hit its own internal growth targets but Wall Street was disappointed anyway.
More recently, Merrill Lynch analysts piled on, saying:
Despite our view that Tesla is an important innovator in the electric vehicle market, with solid technology and a reputable brand, we continue to believe meaningful execution challenges remain and the shares are overvalued. Furthermore, we believe Model S demand could cool off once early adopters receive vehicles and expect the ultimate addressable market for luxury, electric vehicles to be smaller than many expect.
That just about sums up the bear case nicely: Innovation and success aside, TSLA is a victim of its own success, and the stock will have trouble moving significantly higher as a result.
Now after earnings and after this Merrill downgrade, Tesla stock has given up a lot of that premium analysts were alluding to. So should you jump in, then, now that TSLA is more fairly valued?
I’d be leery of that move just yet. After all, this fast-moving stock managed to shock everyone with its meteoric run to the upside … and it’s realistic to expect the downside move to be just as severe.
So for now I’m watching and waiting for the dust to settle.
But if TSLA moves down towards $120, I will seriously consider buying.
More on TSLA Stock
- Unfortunately, TSLA stock has helped sell Tesla Model S cars according to some dealers. (MarketWatch)
- A crazy idea from Bret Kenwell … will Google (GOOG) buy Tesla? (The Street)
- Tesla’s disappointing but not disastrous earnings wrap. (USA Today)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.