Is Tesla Motors, Inc. Stock a Buy Before Earnings?

Some investors may look back at the trajectory for Tesla (NASDAQ: TSLA  ) stock remorsefully, wishing they got in on some of those sweet gains. On the other hand, if you're one of the insightful investors who held during the past several years, congratulations! The stock's performance has been nothing short of monstrous.

Period

Tesla Stock Gain

Year to date

50%

One year

82%

Two years

609%

But is it really too late to buy Tesla stock? While I've made the case that the stock may be at least fairly valued, limiting risk is just as important as seeking out potential gains. On that note, let's take a look at the risk profile of Tesla stock to get a better idea of how investors considering trading Tesla stock should approach shares headed into earnings.

Model S outside of Tesla's headquarters. Image source: Tesla Motors.

The short-term view
While investors with Foolishly long-term time horizons shouldn't pay much respect to the short-term view, we'll give it some attention here for the sake of illustration.

We know several things about the short-term trends and potential for Tesla stock, but, unfortunately, none of it offers much substance for conclusions on whether or not to buy the stock.

First, we know that Tesla stock has, unsurprisingly, been very volatile in the short term.

TSLA Chart

TSLA data by YCharts

Second, we know that there are a number of potential catalysts for the stock in the second half of the year. Baird analysts Ben Kallo and Tyler Frank explained these catalysts in a recent note to investors (via Barron's).

Although we're cautious heading into the quarter because of Q3 consensus estimates, Tesla remains our top pick for 2H:14 with several upcoming catalysts...

Upcoming catalysts include gigafactory site selection, partner announcements and ground breaking, the marketing campaign for the Model X, as well as updates on Tesla's second production line and global demand trends.

Given the volatility of Tesla stock, this week's earnings report is likely to produce a big move in the share price. And, if any of these potential catalysts that are detailed in the quarterly report on Thursday, the stock could swing upward -- especially if it's combined with a solid financial results.

But does any of this speculation about the short term even matter? Tesla CEO Elon Musk doesn't think so. In fact, he thinks making predictions about where the stock is headed in the short-term is a big time waster. Musk explained why he feels this way in the 2014 annual shareholder meeting. 

The much more difficult thing is to say, 'Well, how will the stock market value us in the short to medium term?' That is an impossible thing to say because the stock market is kind of manic-depressive. I mean, particularly with respect to Tesla, you know. But, I mean, the reason Tesla is so volatile is because so much of Tesla's value is a function of market confidence in our future execution. So, if something happens that diminishes or increases that, it has a highly leveraged effect on our current stock price. ... So I'd say, Tesla is a very good investment for the long term, but it's impossible to say what it is in the short term.

So, instead of trying to predict the volatility, perhaps investors may be better off trying to take advantage of the volatility. In other words, investors may be best off hoping Mr. Market sends Tesla shares on a meaningful sell-off at some point in the near future. Pretending we know what a stock, which trades with such forward-looking assumptions like Tesla, is going to do in the short-term is no better than gambling.

The long-term view
For long-term investors, the goal is to simply buy sustainable, excellent businesses at a reasonable -- or better yet: great -- price.

When, therefore, does Tesla stock become a buy?

Tesla Supercharger station outside of Tesla's Fremont factory. Tesla has said its Fremont factory, with the help of its planned lower-cost car, will eventually be producing 500,000 vehicles per year. The timeline for this big goal? 2020.

Considering that the company's market capitalization is currently about half of General Motors, even though Tesla has guided to only sell 35,000 vehicles this year, the stock is almost entirely priced according to its future growth potential. This brings a lot of risk into the picture.

Sure, Tesla's Gigafactory and the company's plan for a lower-cost car by 2017 are looking more likely than ever -- and that's why Tesla stock is arguably worth its current valuation. But given the enormous scale of the future execution priced into the stock, investors are going to want a decent margin of safety when they buy shares of Tesla Motors.

With the risk in mind, as well as the goal of having a margin of safety, investors are probably better off only getting in on this wonderful growth stock if Mr. Market gives them a chance to buy on a meaningful pullback.

It may be tempting to buy Tesla stock before earnings, hoping shares will soar, but no matter how solid the chance of upside is, limiting risk is more important. Better to miss some upside and hope for a meaningful pullback on Thursday than to buy at levels with arguably no margin of safety.

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Read/Post Comments (3) | Recommend This Article (12)

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 July 26, 2014, at 12:53 PM, RobertFaheyJr wrote:

    Buy before Tesla releases a Model X teaser shot, and that's bound to come soon. Tesla is now tooling up to build something that nobody has really seen yet, except in outdated prototype form. A teaser is imminent, guaranteed.

  • Report this Comment On July 26, 2014, at 4:27 PM, JackB125 wrote:

    It seems to me that the upcoming 2Q results are likely to drive a bigger than normal price swing even for Tesla. As a Tesla investor, there are two items in particular that have my attention.

    1) The Gigafactory.

    Where are the partners? I think it likely that we will get news that something has been signed with Panasonic. But, if Panasonic's commitment appears timid with a long, drawn-out investment schedule, that could cause a price drop. On the other hand, if we get a strong commitment with a large contribution to the project ($1B - $2B), it could have a quite positive effect. The possible hidden monster in the room is if a deep-pocket partner (e.g., Apple or Google) steps forward along with a strong Panasonic commitment. Wow! I'd love to see that!

    2) Possible problems with the drive unit.

    Lots of talk about drive unit replacements recently -- especially the multiple Edmunds replacements. Is this a real problem? If the answer is "yes", then we have a LOT more questions. How many Model S's are affected? Is it a manufacturing problem? (not good) Is it a design problem? (really not good) Is there a fix at this point? Will a recall be necessary? This will likely lead us to the more general questions, "How are they warranty costs doing?" & "What are the warrant costs projections?" I really don't see any upsides to this one, just different degrees of downside.

    A third topic that is likely to come up is demand. However, I don't see all the hoo-ha about demand "peaking/dropping" as likely being much of a mover. Some folks are reading way too much into individual geographic delivery numbers while Tesla is doing its best to do delivery allocations as fairly as possible. Vocal "wolf-criers" see any sort of drop in an individual geography's deliveries & immediately -- well, you know. We will probably hear, again, that Tesla is production constrained and will likely continue to be so for the foreseeable future. And, no, North American demand has not fallen off.

    I have to admit that even though the overwhelming bulk of my Tesla investments are very long-term, as I write this comment, I find myself wondering how much a small straddle would run. I consider my planned long-term Tesla holdings to be investments. But, if I decide to do a very small short-term straddle to take advantage of a temporary 2Q results induced swing, that's online gambling.

    This Thursday will be interesting.

  • Report this Comment On July 26, 2014, at 8:31 PM, AjitC wrote:

    I have never been a fan of a green field GF for a huge cost of $5B. Rather see Tesla finance incremental expansion of Panasonic vast Li-ion manufacturing facilities. Focus on Model S, X, optimizing design, manufacturing, and bring down the cost of the autos by $20,000. Lower prices and Supercharger deployment will drive demand all over the world.

    Let somebody else manufacturing Model 3. Tesla can supply designs, tech, etc. Rent the SC network.

    The way the GF is being delayed and Panasonic silence, I think it will be downsized.

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