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Why Tesla Stock Bulls Are About to Get Absolutely Wrecked

Last Updated September 23, 2020 1:52 PM
W. E. Messamore
Last Updated September 23, 2020 1:52 PM
  • Tesla stock continues its exuberant rally ahead of earnings.
  • It’s now trading near February levels that led analysts to warn of a bubble.
  • Valuing the carmaker like a software tech company is a mistake.

Tesla stock (NASDAQ:TSLA) was tops in the NASDAQ on Monday. Shares in the electric carmaker soared 10.15% to close the session at $798.75.

The reason for the surge? Over the weekend, Bloomberg reported Tesla will reopen its Fremont factory  as soon as this week. (Those plans were canceled  after today’s closing bell.)

tesla stock, nasdaq
The electric carmaker (red) massively outperformed its NASDAQ peers (blue) in Monday trading. | Source: Yahoo Finance 

Tesla bulls are also anticipating a glowing first-quarter earnings report.

Tesla stock charted a remarkable rally since announcing first-quarter deliveries on April 2. The company delivered 88,400 vehicles  in the quarter ending March 31.

It was a record-breaking first quarter for the company. By contrast, Tesla’s second-best Q1 saw 63,000 deliveries in 2019.

tesla stock could soar on Q1 2020 deliveries earnings
Tesla just set a first-quarter record for deliveries. | Source: Statista 

That is impressive year-over-year quarterly growth amid the coronavirus pandemic and worst economic crash in living memory. Especially so considering how hard coronavirus hit China – and the importance of the Chinese market to Tesla’s growth.

This growth sent the company’s shares soaring an incredible 79% from an April 2 low of $446.40 to Monday’s high of $799.49 .

But Tesla stock bulls are about to bust their faces when this bubble pops.

Why the Tesla Stock Price Keeps Going Up

Among investors, there is a persistent impression of Tesla as a Silicon Valley software company disguised as a car company. In February, CNBC’s Jim Cramer joined “Squawk Box” to say :

I just think it’s a technology company. You gotta value it as a technology company now that it has earnings.

It was hardly a new way to look at Tesla. At this point, it’s a trope.

In May last year, Forbes ran the headline :

Why Tesla is Not a Car Company and What You Can Learn From Elon Musk

That explains its wild valuations. Tech companies often trade at high P/E ratios and price-to-book ratios. That’s because they burn through an enormous amount of capital to reach scale.

Once they do, the successful ones reap enormous, monopolistic profits  from total market dominance and software’s negligible cost of distribution.

But Tesla is not a software company.

Tesla Remains Overvalued by the Fundamentals

elon musk, tesla stock
Before the coronavirus pandemic tanked Tesla stock with the rest of the market, TSLA was already dangerously overvalued. | Source: AP Photo/Ringo H.W. Chiu

Tesla stock is perilously overvalued. Unlike tech companies that create and distribute software applications, Tesla sells automobiles. There’s no way around that fact. Its revenue comes almost exclusively from vehicle sales .

Its cost structure is essentially different from that of tech companies. Tesla must burn through an enormous amount of cash  to make cars. And it always will to operate its business.

That includes both massive fixed cost overlays and marginal costs per car that are fundamentally different from the software business.

While it’s easy to get confused because Teslas are innovative all-electric vehicles – and do use cutting-edge, proprietary software – present valuations aren’t on the money.

Before the coronavirus pandemic tanked Tesla stock with the rest of equities, it was already dangerously overvalued. In January, its earnings to value ratio was nearly 10 times that of other carmakers. But TSLA just kept rallying into the stratosphere.

By February, Barclays auto analyst Brian Johnson told investors :

Not to sound like an ‘Ok, Boomer’ to the younger investors rushing into TSLA share, but the recent price action brings to mind NASDAQ c. 1999… We continue to believe TSLA is fundamentally overvalued

This side of the global economy crashing, TSLA is trading nearly as high as it was the day Johnson issued his warning about Tesla to investors.

When this stock reverts to its mean long-run value, it’ll be a feast for the notorious short-sellers – and famine for Tesla bulls.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in TSLA as of the time of writing.