NEW YORK (TheStreet) - Electric automaker Tesla Motors (TSLA) reported better-than-expected results and the shares are crashing as I write this. Surprised? Not everyone is. The company's short interest is approaching 30%.
Let that sink in for a moment if you're considering buying or already own Tesla. Almost one out of every three shares on the open market has been borrowed for the purpose of selling it short because that much money believes the shares will decline in value.
I know many will be quick to point at short sellers as nefarious colluding culprits destroying the company; however, nothing could be further from the truth. Short sellers are saving shareholders' collective rear-ends right now. I'll get back to why in a moment, but let's examine the valuation first.
A few months ago, when Tesla was trading around $250 a share, I tried to warn and explain that a company's stock is not the same as the underlying company. In the open auction markets, capital allocation is based on the company, but it is also about market sentiment.
Smart investors know that emotion plays a key role in pricing any given security at any given moment. The flash crash comes to mind as the best recent example of emotion trumping logic. During the flash crash, a friend of mine who is one of the most astute traders I know bought shares of Apple (AAPL) for about $200 a share and sold the same shares for about $240 later the same day.
It's preposterous to suggest that the company's true valuation, the offices, equipment, intellectual property and other assets declined over 20% in value from the day before, and within a few days soared 30% higher in value. The only logical explanation is companies and stocks are only loosely correlated.
Tesla's declining share price is a result of increased, not decreased correlation between the stock price and the company's performance.
Tesla reported a net loss of $49.8 million. Operationally, Tesla hasn't posted a profit yet. Revenue climbed 10% from the same period last year, albeit only 1% above last quarter.
GM's forward earnings multiple is 7.4, Toyota's 8.7, and Ford's at 8.1. What's Tesla's? A "soft" 53, meaning if you use accounting gymnastics and ignore GAAP and a bunch of real -- but we're going to pretend they don't exist -- expenses, a profit can be claimed.
A more realistic price to earnings multiple is closer to 100. Beyond 2015, Tesla should be able to achieve better results. Many, including myself, have faith in CEO Elon Musk's ability and skills to expand this company. It's not lost upon me that electric cars have a future, but it's imperative that valuations remain in context.
Tesla's market share is less than 1% of Toyota's (TM). Toyota is profitable. Toyota's market capitalization is only eight times larger.
Tesla's revenue is less than 2% of Ford and GM, and yet the Tesla's market cap is nearly half of the other two. If Tesla's top and bottom line growth was 50% year-over-year, a valid argument could be made that supports a $200 per share valuation.
Tesla can't get there right now because of supply-chain constraints, and even if it that were not an issue, the company isn't selling cars at a profit.
I know that is expected to change, and a Texas-sized battery factory is in the works. By the time it's up and rolling, however, the market will change, or at a minimum, investors should anticipate changes.
Changes may include GM, Ford, Toyota and others effectively encroaching further into the electric car and alternative fuel sector. Tesla isn't only facing competition from other electric vehicles; other fuels such as natural gas can disrupt growth.
The point is the further out in time one must allow Tesla to grow into its current valuation, the greater the perilous game-changing shifts in the market will disrupt the bull thesis. Just don't confuse my bear thesis on the stock with a bear thesis for the company.
The company is fine - it's shareholders with a cost basis above $200 who may have a problem.
Coming to their rescue and saving shareholders are short sellers. Short sellers buying back shares are holding the price from total unmitigated collapse today. When a heavily shorted stock is falling fast, short sellers are willing to step up and bid to cover when others fear the falling knife.
With over 25% of shares shorted, the safety net is wide, but in the long run, it won't stop Tesla's valuation from reaching a true equilibrium. If you want to own this stock, wait until it's under $100 and scale in slowly. Better yet, sell $100 puts that you won't mind having exercised so you can collect option premium.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.