Despite excellent third quarter results for Tesla (TSLA), the share price for the electric car giant dropped about 3.7% between Wednesday and closing on Friday of last week. Friday, Hampstead Investor (HI) Blogger for Seeking Alpha suggested Tesla stock had been doing too well and would start to fall. Perhaps HI’s prediction came earlier than expected.
Let’s take a look at the numbers. Tesla GAAP net income was $312 million dollars and non-GAAP was $516 million for the third quarter. Automotive revenue increased by 82% sequentially over Q2 due to a large increase in Model 3 deliveries. The electric car was also the best-selling in the U.S. in terms of pure revenue. In turn, there was good volume and free cash flow. So what puts the stock in danger?
“Together, with the share price performance, Tesla has become a less controversial stock. The short interest is declining markedly, so is the implied volatility and even the number of articles on Seeking Alpha,” Hampstead Investor says. HI continued to say the equity story had moved on after bouts of press focused on Elon Musk’s behavior, the exodus of executives from the company and Tesla’s ability to ramp up productions to normal business topics like growth expectations, competition and product progression. HI referred to the stock as having a recent absolute and relative price appreciation, which has given TSLA one of the highest valuations among tech stocks. The blogger considers EV/revenue metrics, which makes TSLA look, as HI says — “cheap.” However, once the blogger adjusts for growth and gross margin using expensiveness ratios, which is EV/ revenues divided by Revenue Growth x Gross Margin, Tesla becomes one of the most expensive in the group.
“Said differently, Tesla is getting priced to perfection. This is largely due to the expected revenue growth falling from over 70% in 2018 to about 30%,” the blogger explains.
HI suggests Q3 (and Q4) results are about as positive as it can get for Tesla stock because some of the key measures that support the high share price like growth, margin and free cash flow will be under pressure after these quarters.
“As Tesla is richly valued, the downside risk is significant, so is the upside potential[…]With limited positive catalyst in the coming quarters and the high relative valuation, I see limited upside in Tesla,” HI predicts. (To watch HI’s track record, click here)
Analysts are skeptical all the same. TipRanks reviewed the ratings of 27 analysts in the last three months and out of the lot, 8 are bullish, 9 are sidelined and 10 are bearish. The consensus price target stands at $326.91, which shows only a 33% upside from where the stock is currently trading. (See TSLA’s price targets and analyst ratings on TipRanks)