Tesla Motors: The Momentum Rally Just Ended

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks opened higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.5% and 0.66%, respectively at 10:15 a.m. EST.

Yesterday morning, in the run-up to niche automaker Tesla Motor's (NASDAQ: TSLA  ) third-quarter results, I wrote, "While I think individual investors are unlikely to come out ahead by trying to 'game' the earnings, betting on a beat or a miss, I think there is every chance that the stock will be volatile in the wake of the release, during today's after-hours session and tomorrow."

Once in a while, I get things right. That's certainly the way things are playing out: The shares were down 12.3% at the end of yesterday's after-hours session, and the same loss is largely reflected in this morning's trading.

On the bright side, Tesla Motors did beat analysts' expectations for a breakeven quarter with a $0.12 per-share profit (ex-items). Furthermore, vehicle gross margin excluding zero-emission vehicle credits (the profit margin per car, roughly speaking) rose to a record 21% -- and better yet, the company says it's on track to achieve 25% in the current quarter.

However, the fourth-quarter guidance that the company provided in its shareholder letter may have soured the market on the stock -- specifically, the section in which the automaker said: "We expect our non-GAAP profitability to be about consistent with Q3. ... Free cash flow is expected to be close to breakeven." In the third quarter, Tesla generated $26 million in free cash flow.

Worse still, investors who were looking to 2014 for any significant cash flow will have been disappointed: CEO Elon Musk told investors and analysts on the earnings call that the company expects to generate a bit of positive cash flow next year. Remember, folks, a company's valuation is ultimately tethered to expected future cash flows, and these cash flows may be starting to look a long way off to Tesla shareholders. Meanwhile, you hardly need a telescopic lens to catch a glance of the stock's valuation -- at 185 times estimated earnings per share over the next 12 months, it looms very large indeed.

Tesla Motors' stock has had a stunning run in 2013, up 400% as yesterday's close. Elon Musk recently told CNBC that the market "is being very generous [with Tesla's value]." It looks like we may be testing the limits of that generosity as the market adopts a more reciprocal "show me" attitude toward Tesla's results.

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  • Report this Comment On November 06, 2013, at 11:46 AM, ffbj wrote:

    I am sorry no self congratulations for saying a stock will be volatile. Now if you had said that the stock would fall 10-15% then you could pat yourself on the back. Look back a few weeks ago to where I commented that the range for Tesla should be $125 to $150. While many others have been saying the stock is trading to high for months. The consensus price target of all analysts is around $130 a share with $45 the low and $230 the high.

  • Report this Comment On November 06, 2013, at 11:56 AM, ffbj wrote:

    The comment alluded to:

    On October 21, 2013, at 5:25 PM, ffbj wrote:

    I think that is about right. A couple of weeks ago, after the fire I thought Tesla might fall to $125 a share, which was an overreaction, but a few days later I amended that to a range of $125-150. I think the $200 a share target price by Deutsche Bank and others, is just way too high.

    In response to "One analysts rates Tesla a sell".

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