Despite the events in Ukraine, the benchmark S&P 500 rose 1.3% last week to cap February with a 4.3% gain -- stocks' best month since October. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) was up 1.4% last week. Niche auto manufacturer Tesla Motors (NASDAQ:TSLA) and online flash-sale site Zulily (UNKNOWN:ZU.DL) outperformed the broad market by a wide margin. In fact, they were two of the top four best-performing stocks in the Russell 1000 index.
The behavior of Tesla Motors' share this week (+16.8%) is a cautionary tale regarding pockets or exuberance developing in the technology and technology-related sectors: In a flashback to the heady days of the dot-com era, the stock popped 14% on Tuesday on the back of a Morgan Stanley report in which analyst Adam Jonas more than doubled his price target, to $320.
To justify that figure, Jonas had to do some fancy footwork:
We argue Tesla cannot be valued on near-term multiple metrics like traditional auto companies given that we expect Tesla to multiply revenues by more than 10x from 2013 to 2016 by nearly 30x by 2020 and around 60x by 2028. We have thus chosen a 15-year time horizon for our DCF which captures the full maturation of the Model S, Model X (and top-hat derivatives) and also the ramp up of its mass market electric vehicle (the Gen 3).
As if he were hiding a clue that the entire report was a prank on investors, he sneaked the expression "utopian society" into one of his graphs (utopia is not that far away -- it begins in 2023). He also managed to find a new $1.5 trillion addressable market for Tesla Motors that would have it fully live up to its name: the electric utility market, naturally. (Tesla is planning to build a "Gigafactory" -- its term -- to manufacture lithium ion battery cells.)
While the people trading Tesla's stock were losing their minds, Tesla CEO Elon Musk remained level-headed and took advantage of the surge in the share price by issuing a $2 billion convertible note, the largest such issue in the U.S. bond market in more than two years.
Let me be quite clear: I'm not a Tesla "hater"; in fact, I'm in admiration of what Elon Musk and Tesla Motors have already accomplished and what they aim to accomplish. Nevertheless, that does not give one license to put any valuation on the stock. The shares are now almost certainly overpriced; durable gains from current levels will only be achieved over the long term, if at all.
The second example of exuberance this week is online flash-sale retailer Zulily (+68% this week). The company blew through Wall Street's expectations when it announced fourth-quarter results that showed, among other highlights, a doubling in revenues year-on-year. (Nonetheless, it's worth keeping in mind that that growth was achieved off a base of less than $130 million.) It's clear from the stock market's reaction that investors expect more of the same in the quarters and years to come.
I'm not a reflexive Zulily skeptic. There's a fundamental difference between Zulily and the upstart e-tailers of the dot-com era: Zulily is free cash flow positive. The site appears to have carved out a nice niche for itself in women's apparel; the trouble is, once it moves beyond niche player status, you can expect it to attract heavy competition. That doesn't seem to worry Jim Cramer, who declared effusively on Tuesday:
I think they can beat [Amazon.com]. Why? Because they are a technology company in the women's apparel business. It's a revolutionary company. I urge everyone to take a look at ZU. The reason why it's up is because it deserves to be up. This is the first legitimate competitor to Amazon I've seen.
Thankfully, CNBC's David Faber was there to pin Cramer down on that claim, with the following key question:
Amazon owns Zappos, for example, a company that was doing an extraordinarily good job with something people said would be virtually impossible to do -- selling shoes -- and then they bought them, and they continued to have great success. Why can't Amazon simply replicate whatever it is Zulily is doing and/or perhaps already is replicating?
I think it's because these guys understand women's apparel better than anyone. ... You go through the conference and you recognize that they understand -- look, retail is technology now and this, at 46% mobile. I mean, this is what you're looking at: Facebook going 50% to 60%. You have a mobile technology company. ... Go back to what [Starbucks CEO] Howard Schultz said: Mall-based shopping -- it is in secular decline. You need to be mobile-based shopping.
Zulily has done a nice job so far, but the environment isn't going to get any easier. Perhaps investors are betting it will share Zappos' fate and be acquired by Amazon? Either way, a lot of things need to go right for this upstart retailer to merit the valuation it now carries.