Tesla Motors (TSLA) has been one of Wall Street’s darlings over the last year, with TSLA stock up about 560% in the past 12 months.
However, shares have started to weaken lately. TSLA stock is down about 12% from all-time highs set at the end of February.
The reason, on the surface, seems to be a spate of unfortunate news regarding Tesla’s unique direct sales model. First came the very public snubbing of Tesla as New Jersey approved legislation to ban direct sales, joining similar efforts in Texas and Arizona. Now Ohio is looking to beat back the electric vehicle manufacturer with its own legislation.
So what’s going on with Tesla? Is this really a story of auto dealers vs. TSLA stock, or is it something more than that?
TSLA Stock: Sentiment Rules
To me, the biggest reason for the rollback in TSLA stock over the last few weeks is sentiment. Traders clearly have been following their guts on Tesla for some time, treating it very differently than other automakers.
One factoid the bears love to throw around is that General Motors (GM), Ford (F) and Toyota (TM) derive a fraction of the market value per vehicle that Tesla commands. Just look at this table and you’ll see the source of some investors’ outrage.
But here’s the thing: Momentum stocks like Tesla don’t trade on fundamentals and inherently defy cookie-cutter valuation metrics … at least in the short term.
Think about LinkedIn (LNKD), a stock repeatedly criticized as a new dot-com dud for its triple-digit forward P/E. That didn’t stop LNKD stock from racing up 240% across 2012 and 2013 while the S&P 500 only added 47% in the same period. Bears finally have been proven “right” as shares are off about 20% in the past six months, but LNKD remains up over 70% from Jan. 1, 2013.
I’d love to be wrong and make those kind of 15-month returns, thank you very much.
Or if you hate tech stocks always being used as the example, think about Under Armour (UA). The stock is up 140% in the last year and has a forward P/E of over 50. Nike (NKE) has a forward P/E of just 22, as does yoga pants purveyor Lululemon (LULU) … so UA stock simply must crash, right?
That’s what the bears told themselves before Under Armour gapped up 20% in January on strong earnings.
The point here is to understand that Tesla is not trading on fundamentals, and that parsing 2013 vehicle sales is helpful only as it informs current sentiment and the future outlook.
If you can’t wrap your head around that, then you shouldn’t be trading Tesla stock.
Bulls vs. Bears in Tesla
What’s interesting lately is that the bulls have started to lose their grip a little bit on Tesla stock. After ramping strongly after Q4 earnings in February, shares have rolled back 12% in a few weeks.
Why? Well, the bad headlines about grumpy local dealers leaning on their political connections is a nice scapegoat. But I actually think a bigger black eye was news that battery supply issues have led to delays in the Tesla Model X electric SUV. Plans were to get the first few vehicles on the road this calendar year, but that isn’t going to happen anymore.
Click to Enlarge Throw those headlines together with the swing-traders and valuation critics who have been sharpening their knives for months, and there has been an uptick in short interest. Check out this chart from Nasdaq data:
What’s even more noteworthy to me is that despite the good headlines across the last few months, the bears have come back in force after abandoning their TSLA shorts last summer and fall.
Volume in Tesla is high, so the days to cover these short bets is well below the average of the last year. But the raw short interest — that is, the number of actual shares held short — is quite high.
After all, there are only about 84.5 million shares of unrestricted TSLA stock — meaning that the 31.3 million shares held short represent about 37% of all stock!
If the news continues to be even mildly bearish, the weight of this negative sentiment will make itself felt further.
But if Elon Musk pulls a rabbit out of his hat, with another strong earnings report in May or a big partnership that fires up the bulls … well, expect yet another short squeeze as TSLA stock tears higher.
Don’t Sweat Anti-Tesla Rules
Whatever happens, volatility is the name of the game in the short term. You’re taking the tiger by the tail with TSLA stock, so speculating about long-term potential or fundamentals is almost counterproductive.
Think like a trader. Watch the news, watch the charts and protect yourself with stops and limit orders when you trade.
“But what about the direct sales model?” you ask. “What about the all-powerful auto-dealer lobby that commands a lot of fundraising and political power? I thought we were going to talk about that?”
Well, unlike many in the blogosphere, I’m not all that worried about this kerfuffle.
There has been a simmer of news about this for some time, and I think other issues are more pressing in the near-term — and I think the long-term is far too murky to speculate on. That goes for Tesla’s direct sales model, as well as China sales and who pays for “free” charging networks if electric vehicles become wildly popular.
But if you want my take, here it is:
The “optics” are horrible for dealers: As a Tesla VP told the New York Times, “The dealers’ argument doesn’t survive well in the light of day, so the trend now is to do these things in a more subterranean way.” That is his self-interest talking, sure, but it also reflects public sentiment. With an innovative car targeting the civic-minded upper-class consumer and a company led by iconic businessmen who refuses to settle for the status quo, Tesla will win the PR war vs. local dealers in polyester suits who are known for unscrupulous sales tactics.
Lack of Showrooms Isn’t a Dealbreaker: And even if some states stubbornly limit Tesla sales? Well, that many only help the car company’s sex appeal. Think back to the original iPhone from Apple (AAPL) and the air of exclusivity. The fact that it was hard to get right away added to the appeal for consumers, and there clearly was strong demand to overcome any short-term delivery bottlenecks. The company has a strong backlog of orders, and the hard-to-get vibe makes TSLA even more appealing. Consider that every year, plenty of Corvette enthusiasts drive to the GM plant in Bowling Green and see their new wheels put together before their very eyes. Or think back to the initial craziness of the Prius hybrid, where waiting lists were the norm. When consumers want something … they’ll get it.
Small Markets Don’t Matter: Oh, by the way … in case you thought Tesla was making pickup trucks, the only markets it really needs to serve effectively are metropolitan areas where affluent drivers are most enthusiastic about this product. By design, Tesla is not a populist car company, and the idea that it needs to have 5,000 dealers across the U.S. is misguided. It will find a way to get enough showrooms in enough places — and leave rural areas alone.
To me, investors have much more to worry about than politics of direct sales, however. Sentiment is sliding, so something is going to give with TSLA stock very soon.
Whether it’s a leg up or down is the big question.
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.