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Why obsessed Tesla stock bulls have lost their minds

Brian Sozzi
Editor-at-Large

The obsessed Tesla (TSLA) bulls need to get a grip on reality once and for all.

Judging by all the Twitter activity in my feed (it’s been pretty ludicrous) following my article on Tesla’s awful sales report Wednesday, there’s a group of investors who remain as delusional as ever.

Is Elon Musk a brilliant fella? Absolutely, there is no question what Musk has built from scratch at Tesla and SpaceX should be applauded. It’s the American dream in its finest form. Does Tesla make electric cars that look more visually appealing than those made by rivals Ford, General Motors and Jaguar? You bet. Are the transportation tunnels Musk is digging in California via his Boring Company a glimpse into the future of metropolitan travel? It sure could be.

But none of that detracts from the obvious: Tesla is an operationally struggling, indebted, capital intensive electric automaker. And that warrants the question: Is Tesla truly worth its $46 billion market cap?

Tesla reality check

Tesla’s stock is valued at an exorbitant 56.2 times estimated 2019 earnings (per Yahoo Finance data) on a price-to-earnings multiple basis. That rich multiple assumes Tesla swings to a profit of $4.86 a share this year from a loss of $5.72 a year ago. Tesla’s price-to-earnings multiple drops to about 30.6 times when using estimated profits for 2020 — the market expects an earnings surge to $8.92 a share, hence the multiple compression.

Such aggressive projections by the Street assume at least three basic things.

One, demand for Tesla’s product line — and that includes the Model S and Model X (it’s not solely a Model 3 seller, people) stays strong. Secondarily, Tesla isn’t out there cutting prices again on its products as it has been of late. And finally, Tesla could drive higher volumes of its cars through a more efficient production line.

One can tweet me any Tesla friendly chart they want, the company simply at this stage has not proven it can achieve the three basic factors underlying Wall Street’s estimated profits. In turn, that should have the bulls questioning why they are so bullish.

Tesla said Wednesday evening it delivered about 63,000 vehicles to customers in the first quarter, a stunning 31% drop. The figure is comprised of 50,900 Model 3 sedans and a meager 12,100 combined Model S and Model X SUVs.

It marked the first quarter-over-quarter fall in Tesla’s sales in about two years. Tesla said it had “sufficient” cash to end the first quarter, hardly confidence inspiring. Management also reiterated its 2019 delivery guidance of 360,000 to 400,000, an odd choice considering the lackluster first quarter delivery performance.

Heck, even the bulls sound a little worried on Tesla right now.

“This quarter was another stomach punch for the bulls as the overall delivery numbers cannot be sugar coated and were a mini logistics/overall debacle in our opinion. While we and many on the Street were expecting a soft quarter and believe profitability will return to Tesla starting in the 2H with 2Q profitability at this point still a wild card depending on the demand/cost cutting trajectory at the company, last night's news puts another near-term overhang over the name,” said Wedbush analyst Dan Ives.

Ives has an Outperform rating on Tesla’s stock.

“We also believe the chances of a capital raise in the $2 billion/$3 billion arena now go from 30%-35% odds to 50%-55% given the current cash situation and lower profitability trajectory going forward,” Ives added.

Tough second quarter for Tesla

Tesla will enter the second quarter in yet another hole after digging itself out of one with a few decent quarters late last year. Staring Tesla in the face in that hole is 2019 delivery guidance that looks too ambitious, a potential profit-sucking capital raise and what may be a peak in interest in what Tesla is selling.

“We believe the results are disappointing across the board and estimate that this could potentially translate into a ~$1 billion plus revenue miss,” thinks RBC Capital Markets analyst Joseph Spak, who rates the stock an Underperform.

Citigroup analyst Itay Michaeli cautions, “At the very least, Q1 deliveries will likely cause the bull camp to revisit assumptions about the near term demand trajectory. Tesla confirmed its 2019 delivery targets, which of course now look quite aggressive requiring ~100k deliveries on average in each remaining quarter. So demand will likely be scrutinized even more so, and the outcome in the coming months could meaningfully re-shape the entire Tesla bulls/bear debate.”

Keep in mind all of that excludes the headline risk associated with Musk’s feud with the SEC.

Let the Twitter tirade on Tesla’s stock continue on what shouldn’t be a $46 billion-plus market cap electric car company.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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