Another week, another round of volatility for Telsa’s stock. So what else is new?
This time, we saw a 4% drop for Tesla Inc. TSLA, +1.69% when the company released quarterly earnings after the stock market closed Wednesday. Then at the open Thursday, the shares rallied, leaving the electric-car company up about 8% in the past five sessions. Runs like this make it hard to get a read on Tesla.
Even after gloomy Tesla headlines recently, investors were quick to change their mind. The company turned around a fourth-quarter 2017 loss of $4.01 a share to a profit of 78 cents a share in the three months through December. And, yes, Tesla lost another executive in the latest sign it is having trouble retaining senior management. But it also announced a much bigger staffing shakeup that includes 1,000 layoffs in California, which many investors saw as an overdue focus on profitability.
Tesla’s stock is in many ways a Rorschach test for investors, a complex company that shows you what you want to see more than a clear and objective truth. But the events of this week are an important reminder that short-termism is in many ways counterproductive to a profitable investment in Tesla.
This is a company that has staying power, and continually proves the naysayers wrong. So here are three big reasons Wall Street is being short-sighted — and why you shouldn’t bet against Tesla’s stock.
Read: Buy Tesla and Facebook stock for the long haul
Fundamentals are decent
Sure, fourth-quarter 2018 figures missed the mark. But keep in mind that in its layoff announcement, Tesla had already warned of smaller profits for the quarter — and clearly addressed those concerns via layoffs.
Also, the aggressive growth targets on Model 3 production and revenue remain intact; Tesla reiterated its goal of producing 7,000 Model 3 cars a week later this year, and analysts’ 2019 revenue forecasts remain almost $30 billion, up from $21.5 billion in 2018.
Furthermore, if you dial back the clock just a few months to October, keep in mind that Tesla blew the doors off with an impressive report that showed $300 million in profits and free cash flow of more than $800 million. Shares leaped at that news, and rallied 20% in about two months that followed, at least until things got rocky again in December.
Volatility is the norm, and no one should be surprised by Tesla’s ups and downs. For now, the declines have been temporary. That’s because of the impressive long-term trend of growth and improvements on the company’s quest to profitability.
Tesla’s valuation is irrelevant
Of course, some investors like to point out that a forecast of more reliable profits in 2019 still isn’t enough to justify Tesla’s $50 billion in market value, particularly compared with General Motors GM, -0.62% which is neck-and-neck in market capitalization despite manufacturing millions of cars instead of Tesla’s tens of thousands a year.
But the truth is that valuing high-growth stocks is always more art than science, regardless of sector or specifics. For years Amazon.com AMZN, -5.38% ran at an operating loss with an infinite price-to-earnings ratio, but now boasts a market cap of more than $800 billion after roughly quadrupling in the past five years. Also consider that about a year ago, General Motors had a forward P/E of less than six and has still managed to drop by almost 10% in the past 12 months.
Investors put a premium on a company with potential, and demand a discount for a stock that looks like it’s falling behind. It’s as simple as that.
Besides, there are good reasons Tesla is valued differently than GM with its next-generation vehicle technology, its lack of expensive legacy pension obligations and comparative insulation from global trade wars.
If investing was as easy as finding a company that has a specific growth rate or a better-than-average P/E ratio, we’d all be rich. The fact is that finding “fair value” for Tesla shares is not nearly as easy as some would have you think.
Financing is just fine
That is not to say that dollars and cents are meaningless, of course. And recently there has been buzz about whether Tesla’s stock will rise enough to avoid an upcoming $920 million hit on convertible bonds that come due in March — quite a hefty tab.
But while this drama is interesting (particularly for those who don’t understand how convertible stock works), it’s worth noting that Tesla is much more financially secure than these stories make it out to be.
For starters, Tesla had $3.7 billion in cash at the end of 2018, an increase of about $700 million from Sept. 30. While the company would obviously rather deploy that cash in growth and production, it’s not at risk of going under here.
Furthermore, Tesla also regularly raises a billion here and a billion there via secondary offerings of stock, including rumors of a $2.5 billion equity increase at the end of 2018. While all these dilutions haven’t been insubstantial, there has been plenty of demand out there to support past efforts and it remains unlikely that will change in 2019.
On top of that, let’s not act like having a junk rating will prohibit Tesla from accessing debt markets in any way via a conventional bond offering. Investor appetite for junk bonds remains robust, with high-yield markets snapping back after trouble in December.
Long-story short: Don’t hold a bake sale for Tesla. It’s financing is fine.
Elon Musk is here to stay
Elon Musk is the CEO everyone loves to hate. He smokes weed during podcasts, his tweets border on securities fraud and most recently he wanted to hang out with YouTuber PewDiePie to chuckle about internet memes.
But if you look past antics like those, one simple fact remains: Like it or lump it, Musk is going to be around for a long time — and as a result, he will fight tooth and nail to ensure Tesla isn’t going anywhere either.
Consider insider transaction history. It shows Musk was awarded almost $20 million of additional shares of Tesla stock in November. That comes after a roughly $25 million purchase in June and pushes his total tally of shares owned to 33.8 million — roughly 20% of the of 171.7 million total outstanding Tesla stock.
If you’re wondering what Musk will do with those shares, it’s not much of a mystery. He was quoted in 2013 as saying: “I will be the last one to sell shares” as he pursues his long-term vision that starts with electric vehicles but moves much deeper into alternative energy. Maybe some on Wall Street don’t have the patience to wait for that vision to become a reality, but Elon Musk has both the means and the will to make it happen.
And so are Elon’s friends
Oh, yeah, and even if you think there’s a chance of some activist investor rolling up their sleeves and mounting a proxy fight, consider that plenty of other insiders exist with transparent loyalties.
Consider billionaire and Oracle ORCL, +1.15% founder Larry Ellison, who owns a $1 billion stake and is a board member and a “close friend” of Musk, according to public comments. Or consider that Elon’s brother, Kimbal Musk, is also a major shareholder.
Even if this wasn’t Musk’s company through and through, he’s not going anywhere with insider connections like this.
Furthermore, have you ever met a Tesla enthusiast? This company has some of the most loyal product owners and shareholders on the planet, and they would laugh in the face of any Big Auto buyout offer or efficiency expert that argues for a management shakeup. Musk may have his rough edges, but like Jeff Bezos and Steve Jobs, he is an iconic leader who has made a career out of proving his critics wrong with his own style of aggressive leadership.
As Silicon Valley icon Peter Thiel said last year at the Economic Club of New York: “I have known Elon for 18 years, and you should never bet against Elon.” That’s evidence that his backers are in this for the long haul, and committed to giving Tesla and its CEO a long leash regardless of short-term stock movements.