To say the past couple of weeks have been tough ones for Tesla Inc (NASDAQ:TSLA) shareholders doesn’t do the matter justice. TSLA stock has slipped from a late-June peak of $386.99 to its current price of $327.78, a 15% rout that may not be over yet. See, once the market turns on a story stock like Tesla, traders tend to pile on it at and even faster pace than they filed into it.
Tesla Inc (TSLA) Stock Isn't a Mere "Trade" Any Longer, for Better or Worse
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Thing is, this pullback was bound to happen sooner or later; hype never lasts.
Current owners and prospective buyers of TSLA can take some solace in knowing, however, that in many ways this weakness could serve as a healthy growing pain for the company and the stock. With reality starting to set in, TSLA stock should start to trade more on results and less on assumptions.
And, despite all the recent nay-saying, the future results still look fairly promising.
Up-Ended
On the off-chance anyone reading this isn’t already aware, a string of unfortunate news is behind the recent selloff of TSLA stock.
The party started on June 26, when Tesla’s auto showrooms added solar panels to the menu. The company has to sell them somewhere, but investors weren’t sure that this is the ideal venue.
The selling effort didn’t raise eyebrows until July 3, though. That’s when Musk suggested the initial Model 3’s would be rolling off the assembly line before the end of that week, with sales beginning before the end of the month. Some — perhaps most — investors just didn’t believe it, as Musk has been in the habit of overpromising and underdelivering.
Fanning those bearish flames two days later was Q2’s delivery report. The company only shipped 22,000 vehicles, falling short of expectations and prompting Goldman Sachs to lower its price target on TSLA stock to $180 from $190. That was about half of where Tesla stock was priced before Goldman voiced its concern that demand for the Model S was plateauing.
In the meantime, Musk had to add one not-so-minor detail to last quarter’s delivery report: as of the end Q2, 3,500 of those delivered cars weren’t actually delivered, but were only in transit.
It wasn’t so much the numbers that spooked the market. It was the plausibility of what Goldman said that seemed to weigh most on investors’ minds. As it turns out, demand for the Model S is waning. It’s not a stretch to say the same is true of the Model X.
On the other hand, it may not really matter.
Next Chapter of Tesla’s Saga
Just for the record, yes, I’m the same guy who more often than not has a criticism of Tesla. My beef lies more in the fact that traders collectively — and dangerously — put TSLA stock on a pedestal. The result of doing so is suffering a 20% setback like the one we just saw.
What if, however, there was a silver lining to this dark cloud? Well, There is.
“There will come a time when, for better or worse, Tesla will be seen and treated like a an actual company. In the meantime, it’s a story stock, with all the risks and rewards thereof.”
In most regards, the second quarter’s delivery lull pushed Tesla stock rather far down the scale, further away from being a story stock and closer to being an actual company that’s evaluated on its own merits. Shareholders, most of whom were unaccustomed to legitimate concerns that Tesla is fallible, responded bearishly.
It’s not a bad thing though. It’s just the typical life cycle for not just a new product, but a whole new kind of product. The initial euphoric phase is winding down. Those buyers who were willing to pay any price for an uber-cool electric vehicle have done so. Left behind is the bigger, value-minded crowd, many of whom have been holding out for the Model 3. Tesla won’t drive as much revenue or profit in its Model 3’s, but nobody ever expected it to. Like all other companies, its mass market product will be a winner because of lower-cost large-scale production and unit volume.
It’s not like we haven’t seen it before. The first home computers introduced in the 1980’s were hilariously useless yet cost a small fortune. Computer companies sold a surprising number of them anyway. They didn’t become a mainstream product until the 1990’s when the underlying technologies, supply chains and designs had been perfected and were built at enough scale to make them affordable for all.
That’s where Tesla is now. It’s in transit between catering to a premium market and serving a mass market. There WILL be growing pains, but that’s okay. That’s the norm.
On the other hand, a few too many traders arguably, and erroneously, thought the transition would be quick and clean.
Looking Ahead at TSLA Stock
As for a realistic time frame, electric charging station company POD Point’s CEO Erik Fairbairne may have served up the most plausible horizon for the electric car movement, saying:
“What we are seeing is the capability of electric vehicles to come up and the cost come down. What we are headed for is sort of a 200-mile range for £20,000 ($26,180) in 2020. In the next few years as we are heading to 2020, all of a sudden the electric vehicles’ capability and the electric vehicles’ price will reach a sweet spot where we will see massive adoption of electric vehicles and that’s not very far away.”
Between now and then, TSLA stock could dole out several major rallies and pullbacks.
It’s interesting that it was a charging station insider who would come up with the outlook though, in that it underscores the parallel between electric cars and the rise of the personal computer.
Think back to the mid-1990’s again. What was going on at the time? That’s when Microsoft’s Windows operating systems made computers easy to use, and when the internet become easily accessible, first via dial-up, but soon after, high-speed broadband. Aside from affordable prices, the technology needed to make personal computers functional had also finally been introduced. It also took a while for the average person to become educated and comfortable with at-home computers.
In many regards, that’s what’s holding Tesla back, and the entire EV industry for that matter. It’s a bit of a pain to keep an electric car charged on longer trips simply because there’s still not much charging infrastructure in place. That’s changing though.
At the same time, a recent survey performed by research firm Altman Vilandrie & Co. found that despite a massive awareness effort on multiple fronts, 60% of U.S. drivers said they were “unaware of electric cars.” What ‘unaware’ means still isn’t exactly clear, but there’s no denying that’s a tall hurdle for the entire EV industry.
Like the lack of charging infrastructure though, awareness is also improving. It’s just going to take time, more than some bulls were counting on.
And that may be the toughest part of all for current and potential owners of TSLA stock. It may have just become a “long game” type of investment, and is now much less of a “trade.”
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
