U.S. stocks were flat this week, with the benchmark S&P 500 down just 0.1% and still within two-thirds of a percent of its early April record high. Meanwhile, the narrower Dow Jones Industrial Average (DJINDICES: ^DJI ) set a new record high on Friday, rising 0.4% on the week, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC ) lost 1.3%. One of the stocks that contributed to the Nasdaq's underperformance this week is Tesla Motors (NASDAQ: TSLA ) (-13.6%), which was savaged in the wake of its first-quarter results. Twitter (NYSE: TWTR ) (-17.9%) suffered a similar fate as the quiet correction in high-profile growth names continues.
Combing through Tesla Motors' first quarter shareholder letter, which the company released Wednesday afternoon, I found the niche automaker's results and guidance quite satisfactory. Indeed, I don't think Tesla did or is doing anything "wrong"; the problem is that the stock's valuation got well ahead of the company's fundamentals, which investors are now assessing in a more sober light. Although the shares are now down by almost a third relative to their 52-week high, that level was the product of such exuberance that I'm not convinced the correction has run its course.
How far could the stock correct? As a useful milepost, I'd like to remind readers that Professor Aswath Damodaran of New York University's Stern School of Business, the guru of stock valuation, valued Tesla Motors' shares at $112.50 in March. That valuation pre-dates last week's results, of course, but anyone who currently owns Tesla shares or who is considering becoming an owner will benefit from reading the blog post in which he discusses his valuation.
For more on Tesla:
- Beth McKenna provides 4 takeaways from Tesla's Q1 conference call.
- Daniel Sparks asks whether it's time to buy Tesla Motors' stock.
Twitter's situation is similar to that of Tesla Motors in that it is a decent business with above-average growth prospects (though I prefer Tesla Motors), but the stock got way, way ahead of itself immediately after its November initial public offering. The catalyst for this week's stock decline appears to have been the expiration of a massive share "lockup" (accounting for roughly 84% of shares outstanding!), with early investors getting their first opportunity to sell their shares. If that was the catalyst, then this week's decline is simply the mirror effect of the very restricted number of shares offered in the IPO -- one of the factors that contributed to goosing the share price to absurd levels.
While some analysts may argue that the overhang of shares that came onto the market Tuesday created a temporary supply-and-demand imbalance that tips the share price away from fair value, I would counter that the price was already distorted by the low float. A broader float ought to help create a tighter alignment between price and its intrinsic value -- that's a good thing for long-term shareholders.
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