At The Wall Street Journal, Charley Grant warns investors that Tesla is just as risky to own as it is to bet against. He writes:
After a recent pullback, its market capitalization now merely hovers around $90 billion, about the combined value of Ford and General Motors. Projections of Tesla’s future market dominance in China have eclipsed the 8% decline in total revenue that it reported for the third quarter. Analysts expect a second consecutive quarterly profit when Tesla unveils full-year results and another stock surge is certainly possible if that proves correct.
But such exuberance means its shares are just as risky to own as to bet against because this remains a story stock. Tesla has never finished a full year in the black, yet analysts expect profits to reach $13.37 a share by 2022, according to FactSet data. A year ago, when shares were about 40% cheaper, that estimate was about $22 a share. The consensus also calls for sales to reach about $44 billion by 2022, nearly double this year’s projected total.
That seems like a stretch since there are signs that demand may have peaked for Tesla’s signature Model 3 sedan in the U.S. But Tesla’s shares are dearly expensive even if those estimates prove accurate at nearly 37 times 2022 earnings estimates. Ford and GM each trade at less than seven times a comparable estimate and are projected to combine for about $14 billion in net income that year—about four times what Tesla is expected to earn.
Yet, as skeptics were so rudely reminded, a stock that is disconnected from its fundamental earnings power can become even more so. The flip side of this is that such violent surges serve to make starry-eyed investors even more dangerously overconfident. They even affect professionals: One analyst raised his target price by $227 during the recent rally.
Bulls who have enjoyed big gains in recent months should consider banking them. Gravity can’t be defied forever—even on Mars.
Read more here.