A Look at Tesla Motors

For those of you out there who have never heard of Tesla Motors, they are a manufacturer of high-end electric cars.  You can take a gander at their website here if you're curious.  My interest in Tesla began earlier this year when they had their IPO on the NASDAQ.  It was touted pretty highly in the financial media, and in the first few weeks of trading, had a lot of volatility, making for good day trading.  When the price dropped below the original IPO price of $17 (bottoming out at $14.98), a really good friend of mine told me that he was going to buy the stock as a longer term investment, and suggested I do the same.   Normally, I don't buy and hold anything for very long, but I sure wish I would've heeded his advice this time.  Anyone who bought at a price under $18 has seen a 100% profit since summer time, with the stock hitting a high of $36 last week, and still trading over $32 now, though the past couple of days have seen some heavy selling, which is likely a dose of profit taking for those who were in since July/August.  The question now - are we seeing an opportunity to buy the dip, or should we be going short??

Let's start with a little background information on the company.  Here is an excerpt from a CNBC article dated 10 November, just subesequent to Tesla's Q3 earnings report.

Shares of luxury electric car maker Tesla Motors Inc. surged Wednesday, a day after the company reported a third-quarter loss that was not as bad as analysts had feared.

THE SPARK: The California company lost $34.9 million, or 38 cents per share, in the third quarter as car sales fell and it spent more on developing a new model.

Analysts had expected a loss of 43 cents per share.

THE BIG PICTURE: Sales of Tesla's $101,500 Tesla Roadster electric sports car fell by about half to 151. But the company is diversifying, and it spent heavily in the quarter to develop its upcoming, lower-priced Model S sedan.

The company is aiming for a mid-2012 rollout of the Model S, which will be assembled in Fremont, Calif.

And here is a link to their latest financials at Yahoo Finance. 

The plain text summary - Tesla Motors is, and has been operating at a loss.  To date, they have one product, an electric car that sells for $101k, and in the third quarter, they sold 151 units, which was approximately 50% fewer units than they sold in the second quarter.  They have plans to produce a second, lower price car, but it won't be out for sale until 2012.  Hmmm...this all doesn't sound too good to me, but apparently the analysts were expecting their sales to be even worse, so even this terrible sounding data was reason to celebrate? 

Now lets take a look at the charts.

There are lots of interesting things to note here.  Starting with the two highlighted circles, these are the dips below $18 that would've produced a 100% winner last week, for anyone who bought and held.  To those, like my good friend, who did this - my hat's off to you.  Well done, indeed! 

Now however, I would like to spend a few lines speculating over why we have seen such an incredible run-up on this stock over such a short period of time...in particular the last 4 weeks.  To begin with, I'll openly admit that I have no issues with this stock at a price anywhere from $17 - $22 a share. Just because a company is operating at a loss doesn't mean they should have a stock price of $0.  I get that.  What I don't get however, is how a company with one product and operating at a loss should see their stock price double in less than 6 months.  There is clearly no fundamental reason for this type of price action, and for those who would argue that part of this meteoric rise is in anticipation of their new product coming to market, I don't buy that either.  If the new car was going to be hitting the streets in Q1 2011, I might be more inclined to agree, but with a first delivery not scheduled until sometime in 2012, it is way too early to get excited about a new product launch. 

So, what does that leave?  My personal opinion, the primary dealers have added Tesla to their high frequency trading (HFT) hit list, and have been jamming the stock higher using QE2 liquidity.  If you refer back to the chart, I've annotated the date where price broke out of the trading range that had been in place for two months or so.  November 4th.  Ring any bells?  That's the day after the Fed's big QE2 announcement, and it's my theory that the 60% rise the stock has experience since then is all fueled on POMO money and the few momentum traders left in the market. 

Right or wrong, we are now at a bit of a cross-roads, as the stock has sold-off a bit the past two days, and is in negative territory this morning as I type.  Here's the thing, QE2 has just begun...we are in month 1 of an 8 month program, so this could be just the beginning of a huge move, if the HFT'ers decide to keep this on their hit list.  Trying to go short when the big boys at JPM and GS are pumping a stock is a good way to go bankrupt, but at the same time, a 60% run in 4 weeks is pretty huge, and begs the question, how high do they still want to pump this before they bail out?  Sort of reminds me of the heady days in 1999 and 2000 when the dot.com stocks all got jammed to the moon.  It was a great ride while it lasted, but for those companies that didn't have a solid business, when the tide turned, it got real ugly, real quick.  I'm probably going to stay on this sidelines on this one, but it should interesting to watch over the next several weeks and months. 

The stock price aside, they do have a sweet looking ride....