On Tesla’s Model 3 Fanfare

Tesla is one of, if not the most polarizing companies out there, from an investment perspective. You are either a 100% believer in every word that Elon Musk says or you believe that the company is the ultimate hype job. There is usually little scope to be somewhere in the middle, but I am just there.

I do believe that Musk is potentially a transformational figure in the same vein as Henry Ford and Bill Gates. At the same time, Tesla’s ambitions are not backed by the marketplace. They have been at best marginally profitable, and have been trending towards markedly unprofitable in the last year, and rely on substantial government subsidies.

The unveiling of their new Model 3 last week was met with all sorts of fanfare. Bloomberg have even declared that the car has already lived up to the hype, despite the fact that it will not be available until late 2017. This morning, they’ve announced that over 325,000 people paid a $1000 deposit for the car.

In truth, that doesn’t mean very much, beyond the great press. The deposit can be recalled at any time, and as such it is basically a loan from the depositors to Tesla, who will use that money in the production process. The risk for Tesla is that between now and the eventual release date, problems may arise which lead to mass refunds of deposits, which put the company in an even more precarious financial position than it is in. Those problems may include things a simple as the $35,000 price point moving higher, or the release date being pushed further and further back. The Model 3 really has to be a home run for Tesla.

Personally, I hope that it is. But with regards to its stock, I cannot justify the stratospheric levels to which it has risen. Quite frankly, TSLA is a company with a great story but very little of substance to back it up (at this time). It could very well come through in the end, but such premises are not what good investments are made upon. A look at the history of the stock is below:

TSLA

TSLA has achieved its great heights mostly on the back of hedge fund driven momentum buying, a feature of the now 7 year bull market from 2009. Regardless of its financials, the hype of Tesla has been the impetus to new highs.

One investing in this stock would do well to wait until Tesla actually develops a track record of consistency in its sales, projections and deliveries on a lot of the promises Musk has made. In terms of the short term action, it is my belief that it will rally to new all time highs, besting the $291 mark it set in 2014. Naturally, $300 might be a magnet. But from there I do not see how there is much upside, especially given I believe we are in the early stages of a bear market generally. Or, at the very least we are in the beginning stages of a substantial (20-40%) correction in the general market.

Should that be the case, the momentum stocks like Tesla are going to be the hardest hit, and as such one should steer clear of them. That said, a massive decline in the stock would be welcome news for real investors. Looking ahead to late 2017, the potential confluence of a much lower stock price much in line with its current fundamentals, and a smooth Model 3 release, would be a fertile ground to plant the seeds of a good investment.

That time has not yet come, however. Playing in Tesla at this stage is a gamble, and participants should act accordingly.