Tesla Motors, Inc. Stock This Week -- Time to Buy?

Why is Tesla (NASDAQ: TSLA  ) Motors stock trading lower this week?

That question seems to be the key subject this weekend for investors watching Elon Musk's electric-car company. Even though the company's first-quarter revenue and earnings per share came in higher than the consensus analyst estimate, Tesla's market capitalization was trimmed by several billion dollars this week as the stock sold off 14%. Here's the backstory on the stock, along with a look at another key question: Should investors pull the trigger on the stock after the sell-off?

Model S. Image highlights the vehicle's "frunk."

Behind the numbers
As I explained in a Tesla earnings preview for Q2, earnings per share and revenue were destined to be an afterthought when the numbers were released. Instead, it would make sense for investors to focus on key items like Tesla's Gigafactory, China, full-year guidance, and the Model X, given the forward-looking assumptions priced into the stock.

The financial results were solid. Analysts were expecting non-GAAP revenue of $699 million and EPS of $0.10. Instead, Tesla reported non-GAAP revenue and EPS of $713 million and $0.12. Vehicle deliveries of 7,535 came in slightly above guidance of 6,400.

So what spooked investors? It's tough to say. Overall, Tesla is executing formidably on every major plan in progress. The Gigafactory seemed on track, with Tesla planning to break ground on the first of two sites in June and Elon Musk announcing that battery supplier Panasonic has signed a letter of intent to partner in the construction of the site. The Model X was also on track for an early 2015 launch. International expansion looked superb, with Musk saying demand isn't a challenge in China and that the company is considering -- at some point in the future -- building vehicles in both China and Europe in addition to its current manufacturing in Fremont, Calif. Finally, Tesla maintained its bullish guidance for 35,000 2014 vehicle deliveries -- a 50% boost over last year's figures.

It's possible that Tesla came in below expectations for Q2 deliveries and below expectations for the guidance for Q3 deliveries. But the fact that the company maintained its full-year guidance for vehicle deliveries shows Tesla feels it is on track. Even more, investors should keep in mind that these results are all supply limited; Tesla is selling every car it makes, with zero spending on advertising.

With no substantial underlying reason for the sell-off, it's fair to blame the company's valuation. With the stock still up 21% year to date and 230% in the past 12 months, there are considerable forward-looking expectations priced into Tesla stock. Trading at about 10 times sales, Tesla's valuation is on par with hot growth stocks -- a whole different breed from typical auto stocks.

Time to buy?
But Tesla deserves a pricey valuation. The company's impressive execution combined with ambitious plans to address an enormous addressable market mean the electric car-maker hasn't even left the runway. Today's sales are just a rounding error in light of the possible trajectory of deliveries investors may see in the coming years. For instance, Tesla plans to sell 500,000 vehicles per year by 2020 with the help of the world's largest factory for lithium-ion and a more affordable all-electric car set for a 2017 launch.

After the recent sell-off that puts shares more than 30% below all-time highs achieved a few months ago, it's a great time for long-term investors to start a small position in the company. Over the long haul, this proven disruptor should provide investors meaningful returns.

Given the wild forward-looking assumptions priced into the stock, though, investors would be wise to limit the risk to their portfolio that could stem from this holding by keeping the position relatively small. Growth stocks like Tesla are known for their volatility. But investors shouldn't let volatility keep them on the sidelines; Tesla is one of the few businesses that possesses many of the key characteristics that make an excellent long-term holding.

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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 May 12, 2014, at 4:21 AM, EvaBrain wrote:

    Dead on Michael. Tesla pretty much reported exactly what they predicted for the quarter. You've got to love analysts though. They raise their target when a stock is going up and lower it when it starts going down. Heck, my 92 year old grandmother can do that. Want to impress me? Move your target price BEFORE the market moves the stock - then I will be impressed. These guys are idiots. Even the questions they asked in the CC were idiotic.

    Tesla posted a net loss for the first quarter along with mixed future guidance, sending the stock down more than 14% for the week to around $183 as of 10:15 AM EDT today. Year-to date, the stock is up nearly 19%. Further you can read more at http://bit.ly/1iF5ohS

  • Report this Comment On May 12, 2014, at 10:21 AM, joeinslw wrote:

    The problem with many of these naysayers, haters, short investors, and just plain people waiting for Tesla's price to come down so they can buy it. That's because I have read so many blogs saying that they "missed it" about a year ago when it was in the 30's and they wish they had bought it then, but they missed it and became to expensive for them to buy, so they shorted or stood by to watch and wish all the time they watched.

    Well, I have to give these bloggers credit for talking the stock down, because that's what they did.

    The stock did 12 cents a share on the last quarter, and 10 cents was expected, one would think that would drive the stock price up, but that wasn't good enough for these bloggers, so they blogged, blogged, and then blogged some more, trying to get the big investors nervous so they would sell driving the stock down.

    After these shorters blogged it seemed to have worked, because the big investors did get nervous and it seems they did sell, because just like humpty dumpty, the stock came tumbling down, but tsla is tough, it will be back, I don't know when but just like the Terminator when Arnold said "I'll be back", tsla will be as well, maybe soon and with a vengeance.

    The question to the big investors, will you be on board at the time? Because as many of you have witnessed tsla doesn't give any warnings when it does come back, it just does.

  • Report this Comment On May 12, 2014, at 11:56 AM, MiserblOF wrote:

    I don't believe that investors were spooked. Sudden moves like this are usually about traders, not investors. My bet is that most investors are holding their shares and considering buying more.

  • Report this Comment On May 12, 2014, at 5:43 PM, Kelly15 wrote:

    Toyota officially announced decision comes after Tesla announced to expand the sales of Tesla Model S sedans to the global market. http://bit.ly/1nGb7Jw

  • Report this Comment On May 12, 2014, at 5:44 PM, Kelly15 wrote:

    Toyota officially announced decision comes after Tesla announced to expand the sales of Tesla Model S sedans to the global market. http://bit.ly/1nGb7Jw

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