After soaring about 90% in 2014 and hitting an all-time high in September, Tesla Motors (TSLA -3.55%) stock has been on the decline, dropping about 34% in less than six months. The last time Tesla stock traded near $189, where shares are at the time of this writing, was May 2014. What does the volatility mean? And what should investors do?
Putting Tesla stock in perspective
Tesla's a fast-growing company -- no doubt. The electric-car maker likely sold around 33,000 Model S units in 2014, up from about 22,500 in 2013. For the fourth quarter of 2014, Tesla has guided to sell close to 11,200 vehicles -- 44% more than in any quarter yet. And don't forget: These are cars with an average selling price of $119,000 and a gross profit margin that Tesla CEO Elon Musk says approached the high end of the 20% to 30% range toward the end of Q4.
Figures retrieved from SEC filings for quarters shown. Asterisk indicates management guidance.
Going forward, the ambitious company believes it will sell about 50,000 Model S units in 2015, and begin selling its Model X electric SUV this summer. Musk has said the Model X will sell for a similar price as the Model S. The company bets the Model X has the potential to eventually outsell the Model S.
Looking way out into the future, an act Tesla investors can't ignore since the car maker's aggressive expansion is already under way, the company plans to get its Gigafactory running by 2016 and begin deliveries of its lower-cost Model 3 by 2017. The factory -- which Tesla says will be capable of producing batteries for 500,000-plus electric vehicles by 2020 -- and the Model 3 could be the company's biggest growth catalysts yet.
While investors should aggressively discount the implications of Tesla's future plans for the sake of conservatism, it's worth noting that if the Model 3 takes a similar share of comparably priced cars in North America as the Model S has taken of cars priced in its range so far, we'll be talking about much bigger numbers in five years or so. Tesla bets it can sell about 500,000 cars per year by 2020. Assuming the Model S and Model X account for a minority of these sales, that would put the Model 3 on par with BMW's 3 Series sales.
But price matters
Here's the tricky part that some investors may be tempted to ignore when it comes to growth stocks like Tesla in an optimistic market: Price matters. If an asset's price gets too far ahead of the company's intrinsic value, even the best companies with the biggest growth potential may no longer be a buy.
Is this what's happened to Tesla stock? When the stock hit an all-time high of $292.42 last year, the company's market capitalization was a staggering $35 billion, or more than half that of General Motors! And how many cars did GM sell in 2014? Nearly 10 million.
TSLA Market Cap data by YCharts.
The media has mostly blamed falling oil prices for Tesla's recent decline. While this could be partly true, since even Musk has said recently that lower oil prices could impact Model 3 sales (if oil prices are still low in several years, when the Model 3 hits the market), I suspect there's more. The decline can likely also be attributed to stock price correction as the market puts the brakes on its incredibly rosy outlook for Tesla.
Given that Tesla is ready to report record sales for Q4, and that management remains optimistic about 2015 and beyond, investors may want to hold shares. But don't expect the volatility go away. With the stock price so dependent on the future, investors should expect plenty more ups and downs.
For investors looking to add Tesla stock to their portfolio, now may be a good time. Based on a valuation of Tesla stock last year, I do believe reasonable returns from this point are possible. But it's probably wise to keep such a speculative position as a small portion of your portfolio. Most important, investors who buy high-growth companies like Tesla should have a long time horizon -- probably five years or more.
