Trading Tesla’s Technology Troubles

Written by GSCR Staff   
Thursday, 21 November 2013 11:00

I saw my first Tesla (Tesla Motors, Inc. – NASDAQ- TSLA - $121.11) automobile a few months back and the first thing that popped into my head was the flying DeLorean equipped for time travel with the innovative ‘flux capacitor’ in the Back to the Future movies. Consider me a skeptic on the technology from my former life as an engineer, but I felt like the Doc when he muttered the famous line in today’s headline, “1.21 GigaWatts?”. My natural inclination was to doubt the all electric automobile platform as a viable competitor to the traditional gas engine.

 

Not to tout an “I told you so moment” here, but Tesla has been in the news a lot recently due to some incidents with engine fires in its Model S automobile. The headlines have been writing themselves. Gems like “Tesla May Burn Investors” are too easy. CEO Elon Musk has pointed out that statistically these are far fewer incidents than gas engines and that the automobiles are safe. He has openly invited inspection from The National Highway Traffic Safety Administration. Is this a fox guarding the chicken coup scenario due to the amount of money the U.S. government has poured into the Company? While Mr. Elon may have a point related to statistics, he may be overlooking the larger issue of fundamental engineering design and testing related to the engines and the electrical system capabilities.

So anyone who has read our stuff before knows that we are all for ‘green energy’ but not at the super subsidized level some proponents desire and Tesla has received. Having said that we decided to take a step back and look at TSLA from the three-point recipe we have developed given the current market conditions.

First, technical analysis remains a crucial component of any stock picking today, and our favorite, Daily Moving Average, gives a very bearish signal for short to long term durations. The charts show support for the $106 level, well below what it trades now. Secondly, TSLA has entered a negative accumulation phase since roughly the start of the 4Q off the $193 price level on about 7.5 million shares traded per day. Finally, estimates of a 35% gain in revenue growth to $3.14 billion in 2014 may seem attractive, but the forward P/E is still over 80 even with the massive stock price drop over the past 6 weeks. By contrast, General Motors (NYSE-GM) has a forward 12-month P/E of 15 and Ford (NYSE – F) has a value of 9 for the important valuation metric. While the comparison is not totally fair from an apples to apples standpoint, it illustrates the likelihood that TSLA is probably overvalued.

We are not alone here as TSLA has received several downgrades even prior to the ‘fire’ sale over the past few weeks. Even with today’s pop on good news from Consumer Reports, we say if you own this one as a short term trade it is time to get out now, or you could be forced into the buy and hope mind frame. You still have doubled your money even if you bought as recently as early May of this year. Don’t get burned. OK, that was too easy.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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