It was a rare bad week for Elon Musk. Shares of Tesla Motors (TSLA 12.06%) plunged 15% on the week. SolarCity (SCTY.DL) closed out the week 8% lower, but the stock actually plummeted 20% during the final three trading days. Disappointing quarterly results -- at least relative to lofty expectations, given hefty valuations -- led to widespread selling of two of this year's hottest stocks.
Even after the dramatic declines, it's hard to feel sorry for those that have been fortunate enough to be long on the electric-car maker and the solar panel installer this year. Tesla Motors and Solar City have soared 307% and 321%, respectively, in 2013. It's hard to fret over sharp corrections when you've still managed to more than quadruple along the way.
However, last week's skepticism can't be ignored. The disappointment behind Tesla delivering just 5,500 cars -- and just 4,500 in the U.S. -- leaves investors questioning the addressable market of its pricey sedans. The Model S is a work of art, but how many people can afford a car that starts at $63,570 and needs to charge every 200-plus miles? Is Tesla's international push an admission that business is slowing domestically?
SolarCity's results were impressive at first glance. Revenue soared 52%, and analysts were already braced for yet another sizable loss. However, SolarCity's guidance calls for a larger deficit during the current quarter than what Wall Street was targeting.
Valuation has been the largest knock on both of these companies. Is SolarCity -- a profitless residential installer on pace to generate $160 million in revenue this year -- worth $4 billion? Is Tesla -- an automaker delivering roughly 2,000 cars a month -- worth $17 billion?
The news isn't all unsettling. One of the things that kept Tesla down after the initial earnings disappointment was a third Model S catching fire in just a matter of weeks. However, Tesla battled the negative publicity by posting an entry on its blog by the driver over the weekend.
"This experience does not in any way make me think that the Tesla Model S is an unsafe car," he concludes. "I would buy another one in a heartbeat."
The SolarCity silver lining rests in the possibility that it has a larger addressable market than Tesla, as it finances its panel installations at levels comparable to traditional electricity.
In the end, neither stock is cheap. However, each stock has been boosted this year by welcome news and improving fundamentals, making it difficult to judge either company based on how the limitations stand now. Volatility will come with the territory. Both companies can live up to expectations yet still find their stocks trading sharply lower than they are now based on valuation. However, the stocks can also bounce higher as SolarCity expands its markets or as Tesla grows closer to rolling out its more accessibly priced car.
