Vetr Blog

Crowdsourced price predictions for the stock market.

$TSLA – Momentum Darling or Overvalued Automaker?

Tesla’s ($TSLA) is the second most-watched company after Apple on Vetr, and the company is up nearly 60% so far this year. Accordingly, the company’s quarterly numbers yesterday got us thinking about momentum and momentum stocks.

The most interesting thing about momentum stocks is that they can defy logic to an extraordinary degree. Traditional measures of valuation go completely out the window when Wall Street decides it is in madly in love with a stock. We’ve seen this time and again, and the refrain is always the same; valuation doesn’t matter with growth stocks. Growth is what matters with growth stocks.


That is, until valuation matters. Then it tends to matter a LOT, and overnight. Wall Street, as any veteran trader will tell you, is a notoriously fickle companion.

$TSLA’s revenue and earnings were a bit better than expected, which inspired legions of the Tesla faithful to reassert the stock’s rosy future. But at the same time, $TSLA looks increasingly like the quintessential momentum stock – just as no one is buying a Tesla because they want to drive an eco-friendly car, no one is buying this stock because they think it is a bargain. They betting on further momentum.

The company’s decision to lower December delivery guidance by 2,000 vehicles is being described as being wrong for the right reasons – the company can’t build cars fast enough to meet demand. Sounds great, right? But among other issues, this was the second quarter in a row that estimates were lowered, while the launch of the Model X was delayed for the fourth time and is now not expected until the end of next year. Although a tech genius, Elon Musk is being confronted with the very pedestrian manufacturing, tooling, labor and engineering problems that have bedeviled every automaker since Daimler. He’s learning that it is exceedingly hard to make a lot of something consistently well and on time.

Meanwhile, $TSLA’s valuation metrics don’t leave much room for error: the stock is trading for 77 times 2015 earnings estimates, 12 times trailing annual sales and a PEG ratio of 4. By any yardstick, the stock is overpriced and has discounted near-term growth to a significant degree. Yet each of the three major corrections in the stock price since 2012 was ascribed to overvaluation, and Tesla went on to set new highs. Clearly, popularity is trumping math, and as those old Wall Street hands will tell you, momentum stocks can continue their uptrends much longer than you think possible.

Tesla is present in well over 50% of the watch lists on, so the company obviously resonates with our growing user base. It has redefined the modern car, and Musk has a track record of being right, so it’s tough to bet against the company. Yet it is also hard to deny that much of $TSLA’s immediate potential seems be baked into the price.

What’s your take? Is $TSLA a $400 stock waiting to happen, or is it one production hiccup away from sub-$200?

Disclosure: At the time of this writing, Vetr had no position in the equities mentioned in this report.