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Santa drives a Tesla Model S

December 17, 2013: 3:10 PM ET
Ho ho ho! At least one stock is having a Santa Claus rally. Tesla shares are surging in December while the market cools.

Ho ho ho! At least one stock is having a Santa Claus rally. Tesla shares are surging in December while the market cools.

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.

So much for the Santa Claus rally that tends to lift the market around the holidays. Most investors are getting a lump of coal in their portfolio this month.

The Dow, S&P 500 and Nasdaq have all declined through the first few weeks of December.

But what's that in the distance? Do I hear Santa on his sleigh? Wait a minute. I actually don't hear much at all. Just a faint whoosh. When what to my wondering eyes should appear, a brand new Model S and absolutely no reindeer!

Yup, Tesla (TSLA) is enjoying a December rally.

Shares of the electric car maker have quietly rebounded nearly 20% this month following a tough October and November, while the rest of the market nervously waits to see if Jolly Old Ben Bernanke will announce that's he going to keep dropping $85 billion in gifts from his magic helicopter. (Tesla was up 4% Wednesday on hopes that the company may soon start selling its vehicles in China.)

I wrote about the company's problems a month ago. At the time, investors were worried about the growing number of fires involving Model S vehicles as well as a third quarter earnings report that, while good, did not live up to the considerable hype.

Even after you factor in this month's pop, Tesla's stock is still 23% below its all-time high. So is the worst over?

Related: Elon Musk is Fortune's Businessperson of 2013

First the good news. The fire concerns appear to be overblown. Cars crash all the time because of human error. Is that a reason to short General Motors (GM), Ford (F) and Toyota (TM)?

Now the bad news. The bigger issue with Tesla is its valuation. The October/November bear run in Tesla hasn't taken that much wind out of the stock.

Tesla is still up nearly 340% this year. Shares trade at 98 times 2014 fiscal earnings estimates. That's, to quote mid-90s one-hit rap wonders Cypress Hill, insane in the membrane. (Insane in the brain!)

Now I realize that Tesla is one of the most rapidly growing companies out there. Sales are expected to double in the fourth quarter. (Fortunately, Tesla does not advertise its expensive cars as Christmas presents like Lexus does in those cringe-inducing commercials.)

Analysts also expect earnings per share to surge nearly 160% in 2014. And yes, you read that correctly. Earnings. Tesla is profitable ...  unlike some of this year's other hot momentum stocks. Ahem, Twitter (TWTR)!

Related: Model S tops Consumer Reports owner survey

But earnings estimates have been falling for the past few months. That's not a good sign. The current consensus estimate for Tesla is a profit of $1.50 per share in 2014. Three months ago, Wall Street was predicting earnings of $1.84 a share.

Until those estimates start heading in the right direction (i.e. up) again, it's hard to imagine Tesla's stock getting back to the peak of just below $200 that it hit earlier this year.

Tesla CEO Elon Musk has said on numerous occasions this year that he thinks the company's valuation is too rich and that Tesla needs to grow into it.

Yes, Tesla is undeniably a fantastic company -- one that has the potential to do to the automotive business what Apple (AAPL) has done to consumer tech and Amazon (AMZN) to retail. But the valuation is still just too damn high. (Much like the rent in NYC, right Jimmy McMillan?)

Related: Musk's next target? Tesla's own 'F150' pickup

So even though Tesla's stock is on Santa's nice list for December, it may not stay that way in 2014. Next year is a pivotal one for the company. It needs to prove to Wall Street that it's not just a niche automaker for the affluent and can possibly crack the mass market as well. That's how Tesla can justify its valuation.

Better ideas are stuck in the mud. The motor's runnin' on Tucker's blood. Since I was writing about electric cars today, I couldn't resist a Name That Tune Twitter challenge from a song about the auto industry in Detroit.

Correct! The song is by The White Stripes. From their (or should I say "his" since Meg White just pounded the drums savagely and not always rhythmically while Jack White did everything else) eponymous first album.

So congrats to Tom! He is lucky that I do not use radio contest rules. I allow fellow CNN employees to be eligible to win. Then again, all he wins is a shout-out in my column. But isn't that worth its weight in gold? Or at the very least Bitcoins? (I hear you can buy a Model S with them.)

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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