Can anything stop Tesla?April 23, 2013: 1:09 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Tesla may be the Apple of the auto business. By that, I mean it's a company that's disrupting an entire industry ... not that it's a stock going nowhere fast.
But can Tesla continue to charge (pun most definitely intended) higher? The electric car maker is undeniably cool. The Model S is sleek and has won a gajillion Car of the Year awards in the past few months.
What's more, Tesla is expected to report its first quarterly profit ever when it releases its first quarter results in early May.
Still, one look at Tesla's valuation makes it clear why this is a stock that has attracted a ton of short sellers. As of late March, more than 40% of the company's available shares were being held by investors who are betting the stock will go down.
Tesla trades at more than 35 times 2014 earnings estimates. By way of comparison, GM (GM) and Ford (F) trade for less than 8 times 2014 profit forecasts. Honda (HMC) and Toyota (TM) are each valued at price-to-earnings ratios in the mid-teens based on fiscal 2014 profit projections.
But it's probably not fair to suggest that Tesla should trade at a valuation similar to its older auto rivals. Tesla is still an early-stage growth company. Its profits are expected to surge nearly 50% annually, on average, for the next few years.
Cole Wilcox, CEO of Longboard, an asset manager in Scottsdale, Az., said he owns Tesla shares and is even considering buying a Model S. He thinks that it's a mistake to look at Tesla's valuation compared to the big automakers from Detroit and Japan.
Wilcox thinks that Wall Street analysts are drastically underestimating demand for Tesla's Model S. Combine that with the fact that short sellers are still circling, and he thinks the stock could continue to soar.
It's worth remembering that stocks with heavy short interest tend to move much higher on any good news. That's because shorts borrow stock and quickly sell it with the hopes of buying it back later a lower price. If the stock price goes up, shorts have to cover their position and return the shares or risk huge losses if the stock keeps climbing. It's a phenomenon known as a short squeeze. That appears to be one of the factors driving Netflix (NFLX) much higher Tuesday.
Netflix, like Tesla, is heavily shorted. After Netflix reported earnings late Monday that were much better than forecasts, some shorts may be rushing to buy Netflix so they don't get crushed. Netflix's stock was up nearly 25% Tuesday.
Tesla has already enjoyed some short squeezes earlier this year after the company first announced that it was expecting to report a first-quarter profit.
And sometimes he may be guilty of fueling the hype machine through social media. The stock took a hit a few weeks ago after Musk promised huge news about the company ... which turned out to be a fairly mundane financing program for Tesla vehicles in conjunction with lenders Wells Fargo (WFC) and U.S. Bancorp (USB).
Tesla's stock has fully recovered from that little bump in the road. But Ben Schuman, an analyst who covers Tesla for Pacific Crest Securities in Portland, Ore., said that the biggest problem facing Tesla now is that investors expect the moon (fitting, given that Musk's other firm is rocket developer SpaceX).
"Investors are essentially pricing in near flawless execution," Schuman said.
Wilcox thinks Tesla may be able to meet such lofty targets. He believes that the company has carved out a defensible position in the auto market by catering to the high-end luxury consumer.
Wilcox also notes that some companies you would think could be competition for Tesla are actually partners. Tesla sells powertrain equipment to Toyota and Daimler's Mercedes-Benz for use in some of their electric vehicles. Toyota and Daimler (DDAIF) are also among the 10 largest shareholders of Tesla. (Musk is the biggest.)
So Wilcox does not fear that one of the big automakers will try to out-Tesla Tesla. It's a fair point. But couldn't you say the same thing about Apple? It wasn't long ago that Apple was viewed as having a leg up on everyone else that made phones. Google (GOOG) changed that with its Android operating system, and now Samsung is the smartphone company that has all the love.
Of course, developing and selling cars is a lot harder than making software for smartphones. And with Tesla rival Fisker reportedly near bankruptcy, it is clear that Tesla is in, uhh, the driver's seat right now.
"If Tesla was going to fail, they would have failed already," Wilcox said. "Tesla has won."
That's probably true. But investors still have good reason to be a little nervous. Nothing goes up forever. See gold, Bitcoin, Apple, home prices, dot-com stocks, tulips, etc and so on.
For now, though, investors (or traders) can enjoy the ride. Even Schuman, whose $30 fair value target for Tesla is 40% below the current price, conceded that betting against Tesla is dangerous.
"It's tough to be aggressively negative about Tesla because valuation is in the eye of the beholder with this stock," he said. "Without a clear negative catalyst, you can't encourage people to sell it."