I am lousy at picking stocks. In fact, the best way to make money in the stock market is to do exactly the opposite of what I do. I decided not to get in on Google’s IPO because I thought the price was way too high. I also advised my wife to buy a chunk of Lucent just a few weeks before the company went bankrupt. All of which is another way of saying I don’t know what I am talking about when it comes to picking winners and losers on Wall Street.
But others claim to actually know a thing or two about playing the stock market game. One of them is Adam Jones, an automotive analyst at Morgan Stanley. He has been a staunch advocate of Tesla stock for the past couple of years, but Forbes reports he lowered his estimate for its target price this week because he says Tesla will not meet its sales forecasts. Elon Musk has said that Tesla will sell 500,000 cars by 2020, but Jones now says that number is unrealistic and that the automaker will sell no more than 300,000 vehicles the end of the decade. As a result, he has lowered his target price from $320 a share to $290 a share.
So why is Tesla trading below $200 a share this week?
According to Seeking Alpha, the answer is simple. Tesla has been the beneficiary of good old fashioned “irrational exuberance”, as Alan Greenspan used to say, and its value is simply re-aligning with reality. It says Elon Musk has too much influence over the company for someone who is is dividing his time between Tesla and several other ventures. To support their claim, they point to this statement in Tesla’s most recent 10-Q filing with the Securities & Exchange Commission:
“We are highly dependent on the services of Elon Musk, our Chief Executive Officer, Product Architect, Chairman of our Board of Directors and largest stockholder. Although Mr. Musk spends significant time with Tesla and is highly active in our management, he does not devote his full time and attention to Tesla. Mr. Musk also currently serves as Chief Executive Officer and Chief Technical Officer of Space Exploration Technologies, a developer and manufacturer of space launch vehicles, and Chairman of SolarCity, a solar equipment installation company (emphasis added).”
Seeking Alpha worries that the company has a history of not meeting its targets (the proposed Model X has been delayed by two years already) and has taken on too much debt. Those concerns are heightened by this statement from Tesla’s latest quarterly report, “We may still incur substantially more debt or take other actions, which would intensify the risks discussed above.” They point out that Tesla’s price to earnings ratio stands at 103.5 as compared to Ford’s, which is a more realistic 12.5.
Seeking Alpha’s position is summed up as follows, “Scaling up the Tesla model remains an expensive concern going forward. While I do like the company and I think it has tremendous potential, there are serious red flags investors should not overlook. Tesla’s stock is not worth buying until its price comes back down to earth.”
In other words, the oldest words in the world of commerce still apply: Caveat Emptor.
Graphic by StockChart.com via Seeking Alpha