Why Tesla's Big Sell-Off Means Nothing

Tesla Motors (NASDAQ: TSLA  ) is down about 12% today on disappointing (in the eyes of the Street) third-quarter results. While traders scramble to make their moves on the big price swing, and the Street analysts rush to adjust their price targets, Foolish investors can kick back and relax.

Mr. Market's silliness
Quarterly results may be dramatic for overly active traders, but for Foolish investors, they're just one small piece of a large puzzle. When Tesla reported earnings yesterday, the electric-car maker actually slightly outperformed consensus analyst estimates. That sparks the notion that guidance was the major culprit behind the sell-off. And, in this case, that may be true.

Word on the Street was that VIN number tracking going on over at Tesla's online forums might have indicated that Tesla was ramping up production more rapidly than expected. One analyst even seems to have considered this dubious VIN tracking as one of his reasons for boosting his Tesla price target to $200. As it turns out, however, Q3 vehicle deliveries seem to be tracking only slightly higher than Tesla guided for -- at 5,500, compared to guidance for "slightly over" 5,000. For the full-year, delivery estimates were boosted by just 500 vehicles, from 21,000, to 21,500.

But does Tesla's ramp-up in production really merit a sell-off to the tune of nearly $2 billion, just because it wasn't rapid enough for the Street? Tesla even emphasized in the second-quarter-earnings call that it doesn't expect to work out its supply chain bottlenecks until 2014.

Tesla's growth story remains intact
As weekly production rates continue to improve, and Tesla continues to outperform its own guidance for vehicle deliveries, there's no reason to believe that Tesla's growth story is any different today than it was before the company reported third-quarter results. Despite the Street's emotional disappointment, Tesla's Model S remains a blockbuster, and its global expansion continues rapidly.

The company is still supply limited. In fact, demand doesn't seem to be an issue at all for Tesla. "Demand exceeds supply, despite no advertising, no discounts and no paid endorsements," management said in Tesla's third-quarter letter to shareholders. And investors shouldn't let Tesla's third-quarter sequential decline in North American deliveries worry them, either. Musk explained in the earnings call that reservations in North America were actually up sequentially, as the company constrained North American deliveries in order to fulfill European orders.

Tesla's making enormous progress on its international expansion. With Supercharging infrastructure in Norway already reaching nearly the entire population, Germany is Tesla's next international priority. Tesla says it will have half of the country covered with even faster 135-kW Supercharger stations by March 2014, and have complete coverage by the middle of 2014. Beyond Germany, Tesla expects that, by the end of 2014, "the entire population of the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg and about 90 percent of the population in England, Wales and Sweden will live within 320 km of a Supercharger station," management said in the third-quarter letter to shareholders. In China, Tesla has already begun taking orders, and plans to deliver its first vehicle in the country next year.

Finally, at a 10,000-foot view, this stock is ultimately priced for its more affordable third-generation car, which Tesla CEO Elon Musk hopes will resonate with the mass market -- and nothing in the quarter suggested this story has changed.

What should investors do?
I'd say the best plan of action at this point would be to do absolutely nothing. If you already believed Tesla was overvalued, a 10% sell-off isn't necessarily large enough to make this growth stock look enticing. If you were already a Tesla shareholder with faith in the company's growth story, there wasn't one item in the report that indicated Tesla's long-term story is any less exciting.

Demand is hot, international expansion is unraveling rapidly, and the outlook looks as bullish as ever. While the shortsighted traders make their moves, Foolish investors can kick back and relax -- Tesla's Q3 results simply confirm an existing story.

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Read/Post Comments (25) | Recommend This Article (39)

Comments from our Foolish Readers

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  • Report this Comment On November 06, 2013, at 12:07 PM, cameron12x wrote:

    Yeah, and we have a bridge to sell you.

    Tesla is currently price ABOVE 2014 earnings!

    And this is no biotech.

  • Report this Comment On November 06, 2013, at 12:13 PM, highgrowthcarson wrote:

    Exactly and precisely so. Excellent article. To back up an excellent Q3 report. Been selling on the way up past few months to rebalance. Just this second added to my existing shares by 25%.

    Stock was undervalued at 195. After this report and drop is now seriously, deeply undervalued.

    Value is mostly based on possibility of EV's replacing internal combustion engine autos in 10-15 years and Tesla doing the bulk of replacing. Lead in battery tech not easily overcome by old, bureaucratic low-tech existing companies.

    Even if this possibility is 10% -- that adds 200-300 to present value.

  • Report this Comment On November 06, 2013, at 12:15 PM, keaters wrote:

    Great product, great company, great story.

    BUT:

    10 x projected revenues!

    40 Projected PEG ratio.

    It ain't cheap.

    It's not as good a buy as APPL was at $700.

  • Report this Comment On November 06, 2013, at 12:25 PM, Jennnnnnifer wrote:

    Excellent article!

  • Report this Comment On November 06, 2013, at 12:27 PM, coll1951 wrote:

    Dan, there is no European market, there's just Norway. No other country in Europe has the generous EV subsidies like Norway. Germany has none, that why only a handful of Tesla's are being sold in Germany. I've seen the current Tesla European order and delivery spread sheet numbers, it's over 80% Norway, and eventually everyone that wanted one in Norway will own one. Norway has one of the smallest car markets in Europe, it's smaller than Indiana's. This is strictly a Rich man or woman's car in Europe, it's 35% higher than a U.S. Tesla, because of VAT and no EV credits or subsidies. For $150K you can buy 2 Germany luxury cars, with plusher interiors and much better handling. This is no Mercedes S Class, I don't care what the Tesla owners think, the Germans wouldn't use the cheesy interior of Tesla.

  • Report this Comment On November 06, 2013, at 12:34 PM, ffbj wrote:

    Well at least the shorts can get back a taste of the oodles of cash they lost. I love Tesla but might only buy a little of it, and only being real long, but its just too far out of my price range for more than a token investment.

    Great story of a modern marvel as we move to ever greater percentages of electricity and less of fossil fuels for motivational purposes, which is what Musk has said all along.

    As far as the stock goes the money has been made, the fat-lady has sung. Move along.

  • Report this Comment On November 06, 2013, at 12:35 PM, Grant2131 wrote:

    A very good quarter and across the board beat, actually, on EPS, gross margins, revenues, deliveries and guidance for deliveries in Q4. A good opportunity to buy on the dip. The new deal with Panasonic covers the battery supply issue for the next 300,000 cars. That gives Tesla plenty of time to address longer term supply issues.

  • Report this Comment On November 06, 2013, at 12:57 PM, jetamerica wrote:

    A nice car and a well run company. Merryll Lynch values the stock around $50, and Goldman around $100. IF they deliver perfectly.

    Sales were only up 6% quarter to quarter. Not a highflyer at that rate. I fall in the Meryll Luynch camp and believe that $50 is a fair value this stock IF they are able to resolve their problems. F, GM and TM all growing sales and income faster than TSLA and their market caps are less than annual sales whereas TSLA loses money even after Gov't aid and has a market cap of $18.2 Billion at $150 a share versus TTM of $1.32 billion =14 X TTM sales. If they do $4 billion of sales next year, still 3.5 times sales versus 0.7 at Toyota.

    The Motley Fool pumping of this stock is embarrassing. Ten positive stories in the three days before earnings and so far only one after.

  • Report this Comment On November 06, 2013, at 5:39 PM, AnsgarJohn wrote:

    @TMFDanielSparks if the stock went up to $1,000,000 per share this year would you sell?

    If so, would you sell at $999,999 per share?

    At what point would you not sell this year? and why. You mention Mr. Market so it sounds like you have been doing some of your own math? Or is this a case of "cargo cult" investing?

  • Report this Comment On November 06, 2013, at 5:49 PM, Newman wrote:

    Now is the time for all good men to BUY TESLA!

    Great article

    Newman

  • Report this Comment On November 06, 2013, at 6:01 PM, Seanickson wrote:

    There will be an EV market but I think tesla will be a niche player and I believe its brutally overpriced. However, history has shown me time and time again that the market usually does a much better job of pricing than I give it credit for. Time will tell

  • Report this Comment On November 06, 2013, at 6:36 PM, cmalek wrote:

    "by the end of 2014, "the entire population of the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg and about 90 percent of the population in England, Wales and Sweden will live within 320 km of a Supercharger station," management said in the third-quarter letter to shareholders."

    All that means is that they can leave their house with batteries fully charged, drive to the Supercharger, arrive with batteries almost depleted, charge batteries, drive home and arrive with batteries almost depleted. WHY EVEN BOTHER?! That's like having a gasoline station every 300 miles.

  • Report this Comment On November 06, 2013, at 7:40 PM, Tsharp1947 wrote:

    I disagree, the price drop means a great deal to those who choose to ignore the "Greater FOOL Theory" and paid close to$200/share!!!

  • Report this Comment On November 06, 2013, at 9:18 PM, Guy3000 wrote:

    True, Tesla has been defying gravity for so long. By all usual measures, investors should not touch this stock with a 10 foot pole. On the other hand, this company is unique (like Google and other dominant tech companies). No other company has been able to emulate it. It is small and nimble. From this point of view, no price is too high to pay for this stock. There are rumors that Google might buy Tesla or do a deal with Tesla to incorporate its self-driving technology into its already advanced cars. If anyone can do this, it is Tesla. Don't wait for Ford, GM, Chrysler, Europeans or Japanese to do this. Only one company can do this at present .... and it is Tesla.

  • Report this Comment On November 07, 2013, at 1:31 AM, LookAtFacts wrote:

    I have shorted this stock since it hit $130 and added to my short position as it has moved up. Why?

    I like the company, I like the product but I think it is priced to perfection. This is a luxury car and not many people can afford to buy it. When it brings out a people's care even with 25% margins, unlikely, IMHO, it will still be priced to high compared to every auto company.

    For the record I sold AOL at $220 was forced to cover it at $280, saw it go to $300 before crashing to $20. I learned from this fiasco, now I sell naked out of the money calls to limit my exposures.

    I love the Tesla story and hope it does really well, I just don't love the stock at these prices. I have a buy order at $50, should miracle happen!

  • Report this Comment On November 07, 2013, at 10:31 AM, jacklalor wrote:

    I think the stock price is a little high for my purposes right now,, but it is a misunderstanding to discount the importance of having "a gas station every 300 miles."

    These vehicles can be charged at home from household 240 volt current. The density of high rate recharging stations with respect to population is very relevant to the merchantability of the product. The 320 km figure (about 200 miles: the range claimed on the Tesla consumer site after a 30 minute Supercharge) gives about the coarsest topology that makes continuous driving an imaginable possibility. So this is an important milestone, although they would need to be a little closer before I planned my trip.

  • Report this Comment On November 07, 2013, at 3:45 PM, David32707 wrote:

    Pump and Dump stock has no hard value, just as the oil companies made the big bucks before, It will be the electric companies and battery technology companies that make it in the future

  • Report this Comment On November 07, 2013, at 9:23 PM, TopAustrianFool wrote:

    TSLA will be worth something once they add a gasoline motor and make it a hybrid. Then and only then it will avoid bankruptcy.

  • Report this Comment On November 07, 2013, at 11:53 PM, Mega wrote:

    "If you already believed Tesla was overvalued, a 10% sell-off isn't necessarily large enough to make this growth stock look enticing."

    Exactly. I'm not covering until I see a much lower price.

  • Report this Comment On November 08, 2013, at 12:56 AM, jiltin wrote:

    I am sorry to differ with your views. I was fond lover of tesla for a long time since I bought TSLA at $41. Lot of Hypes (Investor hypes, but not from TESLA company) brought the stocks to $194. Watching so closely, I sold all stocks at $181. Now, the dust needs to settle and TSLA needs correction.

    1. Revenue is 603M with 5500 cars sale. It is almost 110k per car. With all these, it made 3rd qtr loss. Next four qtrs, it is very likely same story.

    Then, FED pulls off MBS and starts interest rate hike. By that time tesla touches profit, whole economy is going to go down.

    Hence, it is tough for tesla to come back in next four years. Hence, it is better to watch out long term and invest tesla at the next lowest possible period when economy goes down.

    Even though it is an invention, it is hard in near term look.

  • Report this Comment On November 08, 2013, at 1:32 AM, jackdamielsesq wrote:

    By GAAP standards Tesla lost $0.32 per share

    Musk's Tesla has not made a profit in 10 years

    Musk & Obama are living on taxpayer largesse

    Tesla will crash & burn as badly as ObamaCare

    America is not yet fascist & not for want of trying

  • Report this Comment On November 08, 2013, at 3:51 AM, saunafool wrote:

    Tesla is innovative, unique, and a very interesting story to watch.

    The selloff has to do with one thing. Tesla stock is insanely overpriced.

    What do I mean "overpriced?" The market cap per car sold is $800,000! Consider that the market cap per car sold for GM is $3000.

    Let me put that another way. Tesla currently has a market cap equal to 1/3 of General Motors, even though General Motors makes almost as many cars in an 8-hour shift as Tesla makes in an entire year.

    Don't get me wrong. I am not bashing Tesla as a company. What they have done so far is amazing and I wish them the best of luck. However, at some point, price has to be put into perspective.

    If Tesla does everything right they will eventually be worth $16 billion. But not today. Here is what will have to happen. They need to ramp up production to 40,000 units by the end of 2014 and then grow sales at 6% quarter over quarter non-stop for the next 6 years. This will get them to full year sales of about 130000 in 2020. If they achieve 10% net margins, that will be $1.3 billion in profit. Assuming they are still growing at a healthy clip, they should have a P/E ratio of 20 resulting in a market cap of $26 billion. Over 6 years, that is only a 9% annual return.

    That just isn't enough return to justify the risks associated with all of the hurdles Tesla will need to overcome.

  • Report this Comment On November 08, 2013, at 7:49 AM, Mathman6577 wrote:

    $TSLA could become the most discussed, analyzed, long, shorted, etc. stock. and deflect some of the talk away from $AAPL. Time to buy $AAPL?

  • Report this Comment On November 08, 2013, at 9:13 AM, nathponn2014 wrote:

    All you need to do to be a good stock market investor. Is to do your homework and research test and scrutinize all and evey last detail.

  • Report this Comment On November 08, 2013, at 8:20 PM, jalalaram333 wrote:

    I think people buy Tesla out of guilt, pity or to prop it up! not because it is a better car.

    Technology is not there yet.

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