Tesla’s TSLA latest rise puts the stock in a precarious position with five negatives threatening to end the uptrend.
The threats are: Stock performance, Wall Street traders, product competition, 2021 investor selling, and overstated earnings.
Threat #1 – Last week’s 25% rise was “too good.” Sitting atop an already huge 2020 rise, Tesla is in rare air. It now lacks buying support levels to protect against a significant selloff.
The two graphs below show Tesla in a classic bubble, near (at?) the top.
Threat #2 – Wall Street traders are at the ready. Wall Street’s Tesla holders and potential short sellers, alike, have fingers on their trade buttons should the stock show weakness. These traders are unburdened by emotions (hope, fear, and company adoration). Their fundamentals are reality: The stock is overpriced, it sits atop a huge rise, and it has a passionate (AKA emotional) investor base – an enticing mixture for Wall Street traders.
MORE FOR YOU
Threat #3 – Tesla is about to face real competition. Electric vehicle offerings are coming from established and emerging companies, and each has newly designed bodies, interiors, exteriors, and technical embellishments.
Threat #4 – January 1, 2021 launched a new tax year. Therefore, shareholders who postponed selling winners in December 2020 can consider making investment changes, such as rebalancing, partial liquidation and shifting into new investments.
Threat #5 – Tesla’s reported earnings are overstated, a fact not yet widely discussed. The company reverses out stock-based compensation expense from its GAAP (“generally accepted accounting principles”) earnings, thereby producing a higher (non-GAAP) earnings figure. However, that compensation is important. It is the wealth that flows to management through Tesla stock options, and it is a very real expense borne by shareholders.
The table below shows the earnings and earnings per share, actual (GAAP) and adjusted (non-GAAP), for the past 2-3/4 years. Notice the 3rd quarter comparisons of 2020 and 2018 (highlighted in yellow, with the changes in amounts and percent given below). Clearly, the company’s actual earnings growth has been stunted by the huge stock-based compensation amounts. Moreover, the EPS growth has been stunted further by the increased shares outstanding from the compensation.
Note: Most analysts and online sites report Tesla’s non-GAAP earnings (although the online service, Financial Visualizations, uses the GAAP amounts). While non-GAAP earnings are popular on Wall Street, there will be a return to GAAP earnings when the next financial reckoning occurs. (Other accounting alterations have been done in the past that investors tended to ignore when the practicing companies’ stocks were rising.) However, popular usage doesn’t mean investors should follow the non-GAAP crowd now, particularly when the differences are as significant as Tesla’s. Knowing the true fundamentals protects from overpaying for a stock or giving too much credit to management (after all, they are the beneficiaries of the hidden expense).
The bottom line: No bubbles last forever, so beware of Tesla now
Investors understand that short-term trends can change quickly in the stock market. However, long-term trends of highly popular stocks can override that knowledge and produce an over-optimistic “this time is different” mindset. The eventual payoff can be a serious loss, so now is not the time to excitedly buy or hold Tesla stock.