Tesla Motors looks risky after sales miss

Revenue from the automaker was good. . . just not good enough for high expectations.

By InvestorPlace Nov 6, 2013 3:29PM

Tesla Motors CEO Elon Musk drives a Model S at the Tesla factory in Fremont, Calif. on October 1, 2011 (© Stephen Lam/Newscom/Reuters)By Jeff Reeves


Investors in Tesla Motors (TSLA) have been happy to suspend disbelief in the company during the past several months.


Despite the practical constraints of production bottlenecks for the Tesla Model S, despite the forward price-to-earnings ratio of more than 100 for TSLA, and despite the talk of a bubble, there was a huge belief in the narrative and the momentum behind Tesla stock.


But after Tesla earnings for the third quarter shook confidence in this momentum stock, shares hit the skids in after-hours trading. . . and if the breakdown continues, we have only seen the first hints of how bad this crash could become.


Earnings strong, but not strong enough

At first glance, Tesla earnings look great. Non-GAAP revenue was $602.6 million, up 9% from the previous quarter, and strong adjusted earnings of 13 cents a share, topping profit forecasts.


The details reveal some sketchiness, however, since Tesla prefers an accounting system that books the entire life of a lease up front -- and unfortunately, that is not allowed under generally accepted accounting principles.


Using GAAP standards, then, Tesla actually reported a net loss of $38.5 million, or 32 cents per share.


Operating at a loss is never a good thing, but some Tesla stock investors might be willing to overlook this in pursuit of continued long-term success.


However, another disappointing detail in Tesla earnings was the fact that Model S deliveries fell short of expectations. Tesla delivered 5,500 electric cars in total, 1,000 of which went to Europe, but despite decent growth that was below expectations.


And of course there’s the declining zero-emission vehicle tax credits to bolster earnings as Tesla took in just $10 million versus $51 million last quarter. This is natural as the Tesla Model S rolls into overseas markets and even U.S. states that do not have a ZEV credit system, but a drag on earnings nonetheless.


So on the whole, we got a quarter that doesn’t wash with the do-no-wrong valuation for Tesla stock right now -- and thus a double-digit selloff in the immediate aftermath of Tesla earnings.


What’s next for Tesla?

Going forward, Tesla expects to deliver 6,000 vehicles in the fourth quarter for a total of 21,500 Model S sedans this year. It’s crucial for Tesla to hit those numbers, or else this third-quarter earnings report could be seen as part of a long-term trend in production shortfalls, not just an anomaly.


But even if Tesla continues a track record of success, the big question is whether that success will be enough. Consider that the 5,500 Tesla electric cars delivered in the third quarter topped Tesla’s internal forecasts of 5,000 vehicles. . . but it was shy of Wall Street’s more ambitious targets that are weighing on shares.


This expectations game is an unfortunate but stark reality for Tesla stock investors right now. And considering that Tesla CEO Elon Musk recently admitted that the stock is overvalued, it’s crucial for investors to understand that internal goals set by Tesla are actually more important than playing the Wall Street game, even if that means some overly bullish traders get burned in the process.


The future is undoubtedly bright for Tesla Motors, as it began taking reservations in China for its Model S and expects to begin making deliveries in Asia right after the new year. Furthermore, Tesla remains iconic and an undisputed leader in electric vehicles with plans to roll out a more populist Model E midsize sedan at a lower price point.


But investors should start to admit that Tesla stock might be in an untenable position, with incredibly high expectations and the natural bottlenecks of expanding a capital-intensive business like vehicle manufacturing -- not to mention fending off competition from the low-emission plug-in Prius from Toyota (TM), the Chevrolet Volt and Spark duo from General Motors (GM) and other up-and-coming electric cars looking to cash in now that Tesla has proven the EV market to be very viable.


Momentum stocks always end with a tremendous flame-out. Whether Tesla can avoid that crash and burn after the immediate earnings selloff is a fair question, but the reality is that investors who have been sitting on this fast-moving stock should get real about the bumpy road ahead.


One thing is clear, though: All those bearish traders sitting around waiting for the inevitable stumble and selloff in Tesla stock are mighty pleased with themselves.


Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities.


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