How To Profit on Tesla's Compromised Market Cap

NEW YORK (TheStreet) -- There's always been a dilemma between trading and investing. And I don't believe another stock exemplifies this impass today more than Tesla (TSLA). Through no fault of its own, since being driven out of New Jersey, the high-end electric vehicle company has run out of gas.

Shares of Tesla traded flat last week, closing Friday at $212.23. Monday, the stock edged lower by more than 2% to $207.52. Although shares are up 39% year to date, Tesla has leaked 20% of its market cap since shares peaked at $265 in February. Even so, some still consider the stock overvalued. And by several valuation standards, including the company's negative profit and operating margins, I have to agree.

These are the same issues UBS (UBS) analyst Colin Langan raised last week when he initiated coverage on Tesla with a neutral rating at a $230 price target. While he praised Tesla's "disruptive model," Langan cautioned that Wall Street has already priced in what's expected from the company years down the road. In other words, he doesn't see much value in Tesla stock other than 8% upside.

But Tesla's operational metrics, including net income and diluted earnings per share, are not that far off from, say, Amazon.com (AMZN) or Salesforce.com (CRM), two growth stocks that have proven conventional methods of appraisal are at times worthless. Investors have, instead, latched their faith to CEO Elon Musk.

The points Langan raised are no different from what said about Tesla prior to the stock's 470% jump in the trailing 12 months. The more pressing questions today surround the company's next killer product. Can it remain innovative? And if this question reminds you of Apple (AAPL), it should. Elon Musk has been proclaimed in some circles as a paradigm-shifter in the style of Steve Jobs.

And even though Musk has positioned Tesla as the leader in the electric vehicle production, Tesla's success will bring in competitive threats. And don't think for a moment Google (GOOG), which has taken air out of Apple's sales, wouldn't also love a piece of this high-end electric vehicle market. So what drives Tesla shares going forward?

Investors have begun to worry of slowing growth. Some believe the company needs a fuel injection. As with Apple, Tesla markets to the sophisticated shopper. Some call them the "well-to-do consumer" -- those with considerably higher disposable income. But Tesla management has set a three-year target to become more mainstream.

The company's Gigafactory plans to produce a more affordable electric car is the perfect example. What's more, by 2020, Tesla expects to produce and sell 500,000 vehicles per year. For some context, last year it produced 22,500. These are aggressive goals. By the same token, there's been nothing conservative about the stock's response to these plans over the past year.

Like Ford (F) and General Motors (GM), Tesla wants its vehicles accessible to the average consumer. But without gas, can the company get there? Given the company's recent plant constructions, the 10-year revenue ramp looks solid. Even more impressively, profits are increasing.

The New Jersey Commission understood this. They reacted by parking Tesla's stores. They may have been successful at blocking Tesla from selling directly to consumers, but did they take away its horsepower? As with Apple, the Street has now taken a wait-and-see attitude towards Tesla.

Tesla shares will remain in neutral until Musk proves he can overcome political challenges and suggestions that the company needs a tune-up. The extent of Musk's execution won't be known for three-to-five years.

Not many investors placed bets against Steve Jobs and won. Do you want to make the mistake of betting against Musk?

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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