NEW YORK (TheStreet) -- When it comes to Tesla Motors (TSLA), investing professionals are with it and its visionary CEO Elon Musk. It is no longer a struggling new company. Investors love Tesla’s stock even more. It was trading around $40 per share before May 2013; on Tuesday as of 11:15 a.m., Tesla is at $255.38 per share. Some people are complaining about the valuation, but in my opinion, the company is not due for a serious downside correction when the general market is in favor of the technology sector.
Before we talk about why Tesla is not a great short, let’s take a quick look into its historical price action.
More than a year ago, Tesla wasn’t as well known as it is now. It was some investors' best-kept secret. The volume was light and the stock was stuck in a directionless trading range for nearly two years.
The stock was fairly quiet until May 8, 2013, when the company reported its first profitable quarter ever. The stock jumped during the after-market trading session. Volume fired up.
Everyone was trying to get a piece of Tesla even if they didn’t have all the details.
Why was this a game-changing quarter?
Investors finally saw Tesla show its ability to make money -- and shareholders revalued the company. Similar price action happened with Facebook (FB) when it reported better-than-expected earnings with acceleration in the trending mobile market. The surprise quarter reversed Facebook's weak performance.
After May 2013, Tesla’s stock continued its monster rally, despite all kinds of questions and doubts related to its much-inflated stock price.
Musk addressed those concerns by focusing on perfecting the business, which resulted in increased car sales and more ambitious international expansion plans. Then the Model S received the highest rating for safety from the National Highway Traffic Safety Administration and "Best Overall Driver Experience" from Consumer Reports.
Tesla’s rally is fueled mostly by what I call the price-to-dream ratio.
Every traditional, fundamental valuation method says the stock is overvalued. People are willing to pay up for the future. Always keep this in mind -- an overheated stock still isn't necessarily an ideal short target.
Technically, the trading pattern of Tesla is bullish -- traders and investors reacted positively. The stock went up with encouraging reports and any near-term pullbacks were supported by buyers.
Technical analysis is about what and how other people are seeing the stock, not only how you view it. You can see the relative strength in Tesla compared to the broader market.
We all have heard the phrase, "Trend is your friend" -- and the current trend is up for Tesla.
- Timing is critical. Don’t try to short a stock just because of what you think is a reasonable price. You could be right in the future, but your position might not hold up that long. Amazon's (AMZN) stock is another example of how stocks can go up even when the fundamentals are unstable.
- Don’t short a company that has a "problem" other companies wish they had. "Even though we [at Tesla] increased both production and deliveries, average global delivery wait times increased because our production growth was unable to keep pace with increased demand," said Musk in Tesla’s second-quarter shareholder letter.
Doesn't this remind you of Apple's (AAPL) stock rally before?
Tesla is not a short stock for the foreseeable future. Looking to engage with the stock on the long side has a higher probability for investors to make money.
At the time of publication, the author was long TSLA, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
M.J. Zeng is founder of Dreamerstrade.com, a financial education website launched in June 2014. Its mission is to help amateur day- and swing-traders learn the technical and psychological skills needed to succeed in the U.S. stock market.
TheStreet Ratings team rates TESLA MOTORS INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:
"We rate TESLA MOTORS INC (TSLA) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, generally higher debt management risk and poor profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- TSLA's very impressive revenue growth greatly exceeded the industry average of 23.5%. Since the same quarter one year prior, revenues leaped by 89.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Compared to its closing price of one year ago, TSLA's share price has jumped by 88.02%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
- TESLA MOTORS INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TESLA MOTORS INC continued to lose money by earning -$0.71 versus -$3.70 in the prior year. This year, the market expects an improvement in earnings ($1.16 versus -$0.71).
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Automobiles industry. The net income has significantly decreased by 102.9% when compared to the same quarter one year ago, falling from -$30.50 million to -$61.90 million.
- The debt-to-equity ratio is very high at 2.57 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.
- You can view the full analysis from the report here: TSLA Ratings Report