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Why Tesla Investors Should Ignore Wall Street

Tesla said on Tuesday that it had delivered over 1,000 Model S sedans to European customers in the third quarter. Photo credit: Tesla Motors

Depending on how you look at it, Tesla Motors (NASDAQ: TSLA  ) either had a pretty decent third quarter -- or it had a great one. 

The upstart Silicon Valley automaker reported a pre-tax profit of $0.12 per share after the market closed on Tuesday, a bit ahead of the $0.11 expected by Wall Street

So why did Tesla's stock get clobbered when it opened on Wednesday morning?

The higher a stock flies, the harder -- and quicker -- it can fall
When a stock -- any stock -- is trading at over 200 times estimated earnings, as Tesla has been recently, it's typically because investors have very big expectations for the company's future. 

That's certainly the case with Tesla: The 21,500 or so cars it will deliver this year won't come close to justifying the company's sky-high valuation, even after Wednesday's drop. It's the 500,000 annual sales that investors hope Tesla will have several years from now that have driven the stock's price up so high this year.

When you have a stock price powered by so many high hopes, any hint of less than great news can send shares into free fall, at least for a little while. 

We saw that with Tesla in October, when reports of fires in two Teslas -- fires that came after accidents, and that caused no injuries -- were enough to shave 17% off of the stock's value over the course of the month. (Most automakers' car fires don't even make the local evening news, unless there's a pattern that suggests a defect.)

And we saw that again on Tuesday night, when Tesla's third-quarter sales figures didn't meet some analysts' outsized expectations.

But Tesla failed to meet my unreasonable expectations!
Tesla CEO Elon Musk said on Tuesday that the company had delivered more than 5,500 Model S sedans during the third quarter. That's the company's best result yet, and evidence that it is succeeding in its effort to slowly, but surely, ramp up production at its California factory.

But at least one analyst, who had apparently been basing his "analysis" on posts to Tesla fan message boards, thought that Tesla's deliveries would rise even faster. Never mind that Musk himself had said that the company would deliver "slightly over 5,000" Model S sedans during the quarter, this analyst had expectations for much bigger things

It didn't matter that Tesla's deliveries had come in ahead of its own somewhat optimistic guidance. It didn't matter that Musk told investors that demand for the Model S continues to outpace the company's ability to keep up, despite being fueled almost entirely by word of mouth. 

It didn't matter that the big indicators continue to show that Tesla is executing on its plan in impressive style.

When those unrealistic analyst expectations weren't met, the stock price plummeted.

The lesson here: Pay attention to the business, not to Wall Street
Most Tesla investors, at least the ones likely to read this, are in for the long haul. Price drops like the one we saw on Wednesday can be hard for investors to watch, but for long-term investors, they don't matter.

But there are lessons to be learned here. Here's one: Tesla has had enough history at this point for investors to see that Musk's guidance is usually pretty close to the mark. Remember that at this point, we're already more than a third of the way into the fourth quarter. Musk and his team have a fair idea of where the company's numbers are going to end up two months from now.

Because Wall Street is Wall Street, Musk -- like any sensible CEO -- will always be a little conservative in his guidance. That gives the company some wiggle room if events don't play out as expected, and it gives investors a reason to smile when the company "beats" its own estimates, as Tesla did this quarter. 

So far, the safe bet with Tesla -- as it is with most well-run companies -- has been that its numbers will come in just a little bit ahead of where the CEO predicted they would. That won't always be true, because things happen. But it's still the safest bet, no matter what an excited Wall Street "expert" might tell you.

Long story short: Next time around, pay attention to Tesla itself, not the noise from Wall Street.

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Comments from our Foolish Readers

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  • Report this Comment On November 06, 2013, at 7:40 PM, Grant2131 wrote:

    Very good quarter. A solid beat on all the numbers the company itself had forecast. But the momentum behind the stock overshot and now is in check. Expect a more significant pullback until the stock price is more realistic for yes, a great company, but still early in its plan for widespread adoption.

  • Report this Comment On November 07, 2013, at 12:23 AM, cameron12x wrote:

    Ignore Wall Street at their own peril.

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