Can Tesla and SolarCity Bounce Back?

It was a rare bad week for Elon Musk. Shares of Tesla Motors (NASDAQ: TSLA  ) plunged 15% on the week. SolarCity (NASDAQ: SCTY  ) closed out the week 8% lower, but the stock actually plummeted 20% during the final three trading days. Disappointing quarterly results -- at least relative to lofty expectations, given hefty valuations -- led to widespread selling of two of this year's hottest stocks.

Even after the dramatic declines, it's hard to feel sorry for those that have been fortunate enough to be long on the electric-car maker and the solar panel installer this year. Tesla Motors and Solar City have soared 307% and 321%, respectively, in 2013. It's hard to fret over sharp corrections when you've still managed to more than quadruple along the way.

However, last week's skepticism can't be ignored. The disappointment behind Tesla delivering just 5,500 cars -- and just 4,500 in the U.S. -- leaves investors questioning the addressable market of its pricey sedans. The Model S is a work of art, but how many people can afford a car that starts at $63,570 and needs to charge every 200-plus miles? Is Tesla's international push an admission that business is slowing domestically?

SolarCity's results were impressive at first glance. Revenue soared 52%, and analysts were already braced for yet another sizable loss. However, SolarCity's guidance calls for a larger deficit during the current quarter than what Wall Street was targeting.

Valuation has been the largest knock on both of these companies. Is SolarCity -- a profitless residential installer on pace to generate $160 million in revenue this year -- worth $4 billion? Is Tesla -- an automaker delivering roughly 2,000 cars a month -- worth $17 billion?

The news isn't all unsettling. One of the things that kept Tesla down after the initial earnings disappointment was a third Model S catching fire in just a matter of weeks. However, Tesla battled the negative publicity by posting an entry on its blog by the driver over the weekend.

"This experience does not in any way make me think that the Tesla Model S is an unsafe car," he concludes. "I would buy another one in a heartbeat."

The SolarCity silver lining rests in the possibility that it has a larger addressable market than Tesla, as it finances its panel installations at levels comparable to traditional electricity.

In the end, neither stock is cheap. However, each stock has been boosted this year by welcome news and improving fundamentals, making it difficult to judge either company based on how the limitations stand now. Volatility will come with the territory. Both companies can live up to expectations yet still find their stocks trading sharply lower than they are now based on valuation. However, the stocks can also bounce higher as SolarCity expands its markets or as Tesla grows closer to rolling out its more accessibly priced car.

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Read/Post Comments (8) | Recommend This Article (6)

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  • Report this Comment On November 11, 2013, at 11:29 AM, vinipoooh wrote:

    Great article!!! Tesla is indeed an expensive car, but this is where its big success is - niche. No brand will ever be successful trying to cater to ever taste out there.

  • Report this Comment On November 11, 2013, at 1:55 PM, jtinsj98 wrote:

    Don't understand all the talk about the market potential for Tesla. All you have to do is look around, at least in CA where I live, at the # of people driving around in Mercedes E and S classes, Audi A7s, A8s and BMW 6 and 7 series, not to mention Jaguar, Lexus, Porsche, etc. I'm sure the actual numbers are quite high. That is the addressable market for Tesla's Model S. The market potential will only expand as Tesla makes new models and all price points come down. Recharging is gradually becoming a non-issue.

    As for SolarCity, I am not sure why the market and market analysts do not understand the business model, but they don't. Why were analysts so shocked that current quarter guidance called for a larger loss? The fact is that SolarCity is continuing its steep growth trajectory, and as the CEO has mentioned many times on conference calls, the company's growth depends on the capital investment in PV systems and the revenues trickle in over a many years. Thus, they are still in the build-up phase and will be for years to come. However, as the assets age more and more consistent and highly predictable revenue will be coming in very steadily. The market wants immediate gratification, but that is not the way that many good things in life operate. As the old saying goes, "Rome wasn't built in a day."

  • Report this Comment On November 11, 2013, at 2:08 PM, JSD16 wrote:

    If you are writing an article on Tesla's performance in the market last quarter, did you bother to listen to the Earning's Call with Elon Musk? If you did, you'd know it is more production constraint with battery cells than demand constraint. They have had to "starve America to feed Europe." On top of this they actually sold more cars than they said they would, but analysts still had ridiculously high expectations. How many companies perform better than they say they will? Let alone a company like Tesla who is doing well despite all the obstacles with the status quo that they must overcome.

  • Report this Comment On November 11, 2013, at 2:51 PM, bensbubble wrote:

    Wrong headlines.

    For TSLA: "Can Bernanke and Yellen Print even more and ZIRP even longer for his 1%?"

    For SCTY: Can a roofing company lease panels to people with more money than sense while taking all the government handouts itself and not passing any on to its gullible customers, who should get HE loans and buy the panels, thereby getting the windfall tax writeoffs themselves and a fat HE interest rate writeoff to boot?

    For both: Will the staggering AGW windfall subsidies and 'carbon credits' mandated by an unelected EPA continue or even increase?

  • Report this Comment On November 11, 2013, at 6:09 PM, yasyed1 wrote:

    they created an entry point for themselves and stole from individual investor by creating a panic to sell the stock, the stock will be higher by year end possibly 200

  • Report this Comment On November 11, 2013, at 9:16 PM, survive5418 wrote:

    In the end interest in Tesla will died off, it takes too long to long to charge(even if it is super charged). Battery swap will not work because you might come out with an older one than when you first went in. .

  • Report this Comment On November 11, 2013, at 9:18 PM, survive5418 wrote:

    In the end interest inTesla will died off, it takes too long to charge(even if it is super charged). Battery swap will not work because you might come out with an older one than when you first went in.

  • Report this Comment On November 12, 2013, at 1:32 AM, singaporenick wrote:

    This guy writes about everything but seems to know little.I would suggest sticking to something you know about in future.

    The whole point of the Tesla quarter was that it was supply constrained (specifically on batteries) not demand constrained as this author states.

    Do you have editors at Motley Fool?

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