The Right and Wrong Reasons for Owning Tesla Motors' Stock

This morning's better-than-expected number of initial jobless claims was not enough to lift U.S. stocks today, as the benchmark S&P 500 ended the session with a 0.2% loss. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) was essentially flat, down just three hundredths of a percentage point. On Monday evening, I pondered whether the momentum rally had just stalled and, while the jury is still out on that question, there does seem to have been a shift away from high(er)-beta shares this week, including technology and small-capitalization shares, both of which continued to underperform the S&P 500 today.

Furthermore, the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) and the small-cap Russell 2000 Index have been very tightly correlated since the beginning of the week, particularly during the past two days. One of the high-profile growth stocks that underperformed today is Tesla Motors (NASDAQ: TSLA  ) , which lost 2.6%. While Tesla's stock is already down by more than a fifth from its 52-week high, the price remains significantly above its intrinsic value (more on this below), which suggests that further declines could occur.

A possible catalyst for today's drop was the publication of a research note by Wedbush Securities, lowering its price target for the stock from $295 to $275 on the basis that:

We take a moderately more conservative position on evidence of rising risks for Tesla's Giga Factory with a noncommittal commentary from Panasonic and supply chain indications that materials asking prices are rising. [Note: the gigafactory -- Tesla Motors' own term -- refers to a planned battery manufacturing facility.]

Nevertheless, whether $295 or $275, these are breathtaking numbers as another, more interesting piece of research published this week demonstrates. I have referenced in the past the blog of Aswath Damodaran, who is a professor of finance at New York University and the guru on stock valuation. On Tuesday, he published his revised valuation of Tesla Motors. The good news for Tesla bulls is that his new estimate of Tesla's per-share value has risen by two-thirds compared to when he performed the same exercise in September. The bad news is that, at $112.50, it is barely more than half the current share price.

If you own shares of Tesla Motors or are considering owning them, I cannot urge you strongly enough to read Professor Damodaran's blog post in its entirety (as well as the discussion in the comments section, in which he participates.) Not only does Professor Damodaran present and discuss his assumptions, but he also provides links to his valuation spreadsheets so that investors can perform their own analyses.

Finally, the post contains some broader thoughts on the nature of investing that are filled with wisdom. Prof. Damodaran is a value investor, at least insofar as "investment philosophy is built on the foundation that you should buy an asset only if trades at a price less than your estimated value for that asset." As such, he "cannot justify buying Tesla at the current price;" however, he allows that people may follow other approaches:

Your philosophy on investing may be different from mine, and probably better (or at least more lucrative). If you are a Tesla stockholder, though, I hope that you are one for the right reasons. That would include being a trader (whose focus is price, not value), buying into the disruption model or investing on the expectation of an acquisition, but it would not include investing because others have been making money on the stock, equity research analysts are bullish or just because you love the company, its products or its CEO.

In other words, the only rational, purely fundamental reason for buying the stock is believing in the disruption model (read the post to understand what this means.) There is nothing wrong with that per se, but it looks like a very long odds bet to me.

Forget Tesla: Why I'm investing $117,238 in this one stock
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 28, 2014, at 1:09 AM, DrDauger wrote:

    I am long TSLA starting at $35 because I forecast then, while so many naysayers were down on it at the time, that it would reach $70 by the end of 2013. Of course in hindsight I'm quite pleased. I haven't sold any because I think it will continue to do well on average while swinging wild with volatility.

    It's worked before for me. I bought AAPL at split-adjusted $5. That was 1998, when Dell said Apple should be liquidated. I still have a piece of that position.

    My only regret about TSLA is not buying even more at $35. But even if I think it might exceed $700 by 2020, I have a hard time justifying investing more at $210+ because it could just float in the $200s too. Similarly I couldn't expect a new investor to buy here either. Maybe try to catch a downswing into $150. Maybe.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2894003, ~/Articles/ArticleHandler.aspx, 10/25/2014 6:49:11 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement