2 Big Movers: Tesla Motors and Twitter

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:

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.

Beyond Tesla and Twitter: Are you ready to profit from this $14.4 trillion revolution?
Every investor wants to get in on revolutionary ideas before they hit it big -- like buying PC maker Dell in the late 1980s, before the consumer computing boom, or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hypergrowth markets. The real trick is to find a small-cap "pure play" and then watch as it grows in explosive fashion within its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 trillion industry. Click here to get the full story in this eye-opening report.


Read/Post Comments (2) | Recommend This Article (3)

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 11, 2014, at 7:06 PM, SteveTG3 wrote:

    "the guru of stock valuation", what do you base that on?

    I had a dialogue with Damodaran in the comments section of that blog. He acknowledged not only that my contention that he is vastly overestimating capital expenses for Tesla for the next 10 years may well be accurate, but he was also humble enough to acknowledge that I had more knowledge of the company than he does. He is not a guru, and I think he's mature enough to say so himself.

  • Report this Comment On May 14, 2014, at 7:48 PM, TMFAleph1 wrote:

    @SteveTG3

    Thanks for your comment, but I beg to differ -- I did not claim that Damodaran is a guru on every public market equity, but he is most definitely an authority when it comes to equity valuation methodologies.

    Incidentally, when I recommended Damadaran's post on Tesla's valuation, I also specifically flagged the discussion in the comments section.

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: 2952534, ~/Articles/ArticleHandler.aspx, 9/22/2014 2:28:25 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