In the second day of trading after electric-car maker Tesla Motors (NASDAQ:TSLA) unveiled the world's fastest four-door sedan with the built-in technology to eventually drive itself, the stock is down again. Today's 5% decline on top of Friday's stock sell-off has shaved off about $3 billion of Tesla's market capitalization in just two trading days. Here's an attempt at diagnosing Mr. Market's volatile behavior, and why it doesn't matter for long-term investors anyway.
The Elon Musk Fund takes a tumble
Growth tech stocks with rosy valuations have been undergoing somewhat of a correction for the last several weeks, and Elon Musk's precious children, Tesla (where he is the CEO and chairman) and SolarCity (NASDAQ:SCTY.DL) (Musk's big bet on solar power, where he is the chairman) have been no exception to the rule. In fact, they have been subject to some of the more serious beatings.
While we can peg some of the recent sell-off of the "Musk Fund" to a broader correction of bullishly valued growth stocks, the extent of damage to Tesla and SolarCity clearly shows there is more to the story.
The uniqueness to the bigger sell-off of Tesla and sister stock SolarCity is almost certainly related to the borderline euphoric valuations on these stocks -- ones that even make Facebook stock look fairly valued. Unlike Facebook's lucrative fast-growing bottom line, both Tesla and SolarCity have yet to report a regular profit, yet Tesla stock trades at about half of General Motors' valuation, and SolarCity stock, though it is down meaningfully this year, is still up more than 300% in the past two years.
Sure, these companies are growing rapidly and are expected to continue to do so, making them worthy of considerable premiums. But during a market correction, it's often stocks like Tesla and SolarCity, with their very forward-looking valuations and their three-year track record of triple-digit gains, that get the most severe sell-button treatment from the short-term-obsessed investors running the Street.
But is selling Tesla stock a wise decision?
On Thursday, Tesla announced it is now taking orders for what is arguably the best four-door sedan ever made, with a mind-boggling zero-to-60 mph time of just 3.2 seconds. The new flagship Model S, which Tesla calls the P85D, also has all-wheel drive and an extra 10 miles of range. To top it all off, the company is now including a suite of sensors and cameras in all of its vehicles that will, after a series of software updates in the coming years, eventually enable Tesla's vehicles to drive themselves most of the time.
Meanwhile, the company has over 20,000 orders for its upcoming Model X SUV and continues to see demand for its Model S sedan outstrip supply. Then, of course, there's the company's $5 billion Gigafactory that it is building in Nevada, which threatens to disrupt the entire auto industry. And Tesla's Model 3, which is the first low-cost model it aims to build with the help of the economies of scale in lithium-ion batteries achieved from the Gigafactory, is only several years away.
So, does selling Tesla stock make sense today? If your investing money is money you need access to in the next five years -- possibly. After all, who knows what forces will drive the market in the short term? But if you're interested in investing in and making money from the best businesses with the biggest prospects, it's probably best to just hold on through all of the ups and downs.
Sure, there's risk in owning pricey stocks like Tesla. And Tesla specifically is making a risky move by betting the house on just two fundamental themes: battery-powered electric cars and the fast-growing energy storage market -- a move that means that if either of these markets doesn't live up to expectations, Tesla stock may bring more turbulence over the long haul than it is worth. But on the other hand, it's Tesla's intense focus on being the best pure play in electric vehicles that paves the way for great opportunities ahead. And it's the stock's premium market capitalization that is evidence of investors' belief in the business performing exceptionally over the long haul.
Down more than 20% from its all-time high, it might even be time to start buying Tesla stock -- albeit cautiously and in small quantities. At the very least, the stock is a hold in my book.