U.S. stocks rebounded on Wednesday, with the benchmark S&P 500 gaining 0.6%. Meanwhile, the narrower Dow Jones Industrial Average (^DJI 0.31%) rose 0.7%, while the technology-heavy Nasdaq Composite Index (^IXIC +0.89%) fell 0.3%. Two high-profile growth stocks that weighed on the Nasdaq today: Tesla Motors (TSLA +2.45%), which was down 3% in the run-up to this afternoon's release of its first-quarter results (see below) and Twitter (TWTR +0.00%), which added a 4% decline to yesterday's 18% loss.
With regard to Twitter, the fact that there was no bounce today following such a sharp loss suggests that fundamental investors don't see value in the stock at current levels and will not step in to replace momentum traders, who have soured on the shares. As far as I'm concerned, their valuation doesn't look attractive; I think further price declines -- significant ones -- are likely. (Here's a more detailed version of my argument that Twitter's correction isn't over.)
Judging by the after-hours action in Tesla Motors' stock, investors aren't impressed with some aspect of today's first-quarter results announcement. On paper, it doesn't look like the reaction was related to what the company achieved in the first quarter:
- The company beat Wall Street expectations on earnings per share, with $0.12 (adjusted) against a consensus estimate of $0.12, per the Thomson Reuters Financial Network. Revenues also came in ahead of expectations, at $713 million (adjusted) versus $699 million.
- Drilling down to the sales floor, so to speak, deliveries of 6,457 Model S vehicles were squarely in the middle of the 6,200 to 6,600 range of analysts' estimates and slightly above Tesla's own forecast of 6,400. No complaints there, presumably.
- Cash flow from operations was positive, at $61 million -- although free cash flow was negative $81 million, because of $141 million in capital expenditures.
In terms of outlook, CEO Elon Musk confidently states in the quarterly investor letter that Tesla is "pressing forward on a variety of initiatives to continue our growth in 2014 and beyond." Normally, I would heavily discount that sort of statement from a chief executive as, well, executive-speak, but Musk is not your garden-variety CEO. The number of fronts on which Tesla Motors is "pressing forward" is dizzying, including its retail expansion in Europe and China, the expansion of its store and Supercharger network in the U.S., the development of the Model X (due next year), and the construction of its battery "Gigafactory."
In all, the company reaffirmed its goal for non-GAAP automotive gross margin of 28% by the fourth quarter and its projection of capital expenditures in a range of $650 million to $850 million. (Note: "Non-GAAP" indicates that the gross margin metric Tesla Motors is tracking does not conform to generally accepted accounting procedures.)
Here's the rub
All of which leads to a pressing question: If both first-quarter results and the full year both look positive, why is the stock down nearly 8% in after-hours trading? I think it comes down to two factors that Tesla Motors shares with Twitter: A shift in sentiment toward high-profile growth names combined with an overvalued stock.
In that regard, I found one comment from a stock analyst that I think is particularly revealing: "[First quarter deliveries] beat, but not by as much as people expected them to beat. Overall these look like good results at a first glance." That's what Andrea James, an equity analyst with Dougherty & Co., told Bloomberg. (James rates Tesla a buy.) If a company beats, but expectations were for a higher "beat," did it really beat in the first place? In other words, the stock price before the earnings announcement was based on expectations that are higher than the published consensus forecasts.
As names such as Twitter and Tesla have been pummeled recently, investors have become more skeptical and are setting the bar higher if they are to support their high-flying valuations. Tesla Motors is an extraordinary company with a truly visionary CEO; however, that doesn't justify any price for the stock. At their current level, the shares continue to look overvalued to me, which suggests that tomorrow's (likely) drubbing won't be the last.
