Why Tesla is Going Down
The Next Apple
One Great Security Stock
Last week, Tesla Motors (TSLA) reported third-quarter results.
The company delivered more than 5,500 Model S vehicles (including mine).
More than 1,000 vehicles went to European customers, a big market that is just opening up, and at least one went to China, which is now the biggest market in the world.
Gross margin, excluding ZEV (zero emission vehicle) credits, increased to 21% (all numbers non-GAAP), up from 14% in the previous quarter.
Revenues were $603 million, up 9% from the prior quarter and beating analysts’ official estimates by 12%.
Earnings per share hit $0.12, beating analysts’ expectation of $0.11.
Cash increased by $49 million to $796 million. You can play with accounting methods all you want, but cash is real.
Demand continues to exceed supply, despite the fact that the company has done no marketing.
In sum, the company continues to make great progress.
Furthermore, the future is bright.
Tesla expects to deliver just under 6,000 vehicles in the fourth quarter.
It continues to roll out its Supercharger network, which allows users to recharge, very rapidly, for free.
And it expects gross margins in the fourth quarter to hit 25%, which very impressive for an automobile company.
If there is one fly in the ointment, it’s the supply of lithium-ion batteries, which has the potential to be a real bottleneck some years down the road unless supplies can be increased. But for now, all is well, thanks to an agreement with Panasonic to guarantee delivery of at least 1.8 billion cells over the next four years. (Each Model S has an average of 7,000 cells.)
Fundamentally, it all sounds good. Tesla remains on course as the leading force in the transition from a fossil fuel automobile environment to one powered by quiet, smooth and efficient electricity.
So why is the stock going down?
Some people might say it’s because of fires, which have certainly made the headlines. But no one was hurt in the fires, and it’s worth noting there are 150,000 gasoline-powered car fires per year in the U.S. (most of which don’t make headlines). It’s also worth remembering that the National Highway Traffic Safety Administration gave the Tesla Model S its highest ranking ever.
No, the real reason the stock is going down has nothing to do with the news and the facts; it has everything to do with the chart and perception!
So let’s start with the chart.
A year ago, TSLA was trading at 30.
At the time, the car had recently received top marks from Motor Trend, Automobile Magazine and Consumer Reports, among others, but there was still widespread doubt about Tesla’s ability to survive as a business. In fact, there was no evidence the company could even make a profit.
Most important of all, the stock market was doing nothing. There was no appetite for risk. So TSLA traded around 30.
But the stock had the potential to go up, because the vast majority of investors did not own TSLA. So when the bull market started rolling a year ago (just as we were heading toward a fiscal cliff), and investors began taking on more risk, and Tesla started selling more cars, TSLA started moving. And when the company released its blockbuster first-quarter report, the stock’s ascent accelerated—all because potential investors were rapidly upgrading their perceptions of the cars, the company and the stock.
Throughout the summer, all was rosy for both the company and the stock. As the news kept getting better, positive vibes around the Model S grew and grew. And as their perceptions of both the cars and the company grew, investors kept piling in, making TSLA the top-performing stock of the year.
Eventually, the stock hit 192, for a gain of 540% from that 30 starting point. But no trees grow to the sky. And at 192, TSLA was trading in nosebleed territory, with a lot of momentum investors itching to take profits and jump ship the moment the uptrend ran out of gas.
In hindsight, we can see that it was the first Model S fire that was the catalyst that started the selling. But even more important is that the stock market as a whole had come a long way (the S&P 500 was up 21%, with many glamour stocks more than doubling), and the climate was ripe for the sellers to take charge.
And so they did, which shouldn’t surprise anyone who’s spent decades studying the movement of stocks, particularly revolutionary stocks like Tesla Motors.
So now, what had been an incoming tide for both TSLA and the market has become an outgoing tide (for TSLA and possibly the market), as investors take profits, and potential investors sit on their hands, waiting for TSLA to bottom.
As I write, the stock is some 30% off its high.
So what comes next? Well, if you’re a subscriber to my Cabot Stock of the Month, you’ve probably taken some profits, which I advised doing repeatedly beginning in August. And maybe you’re holding some for the long-term, like me. I still believe in the company’s potential to revolutionize the auto industry, and believe management has the smarts to do it.
But I don’t think this stock is a buy here, mainly because one of the market maxims that’s been burned into my brain is, “Don’t try to catch a falling knife.”
That 30% drop could easily grow larger. In fact, one rough guide is that a growth stock can give back half its prior gain—which would take TSLA down to 111.
Also, there’s technical support at 120, and the 200-day moving average is now at 104 and rising, so somewhere in there, TSLA is likely to bottom.
But trying to pick that bottom is a fool’s game.
And anyone who tells you he knows where and when the stock will bottom is lying.
For now, I’m content to sit back and watch the negative sentiment grow—three fires now!—as the market once again teaches a lesson about investing in high-profile stocks.
Also, I’m looking for the next big winner, and I have one candidate below.
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All too frequently these days, when someone wants an example of a successful company that was a great investment, they trot out Apple (AAPL). Sure, Apple was a great success in the past decade, but people forget that Apple (originally named Apple Computer) struggled for more than a decade back in the 1990s, while IBM and Microsoft ruled the computing world.
Apple didn’t hit a home run until it began to revolutionize the music business with its iPod, and then used that as a springboard to create the iPhone. Yes, the company’s original products were good, but they did not serve the masses as well as the competition’s did. It was the company’s second and third business lines that served the masses and changed the world.
And now here’s another company that MIGHT be on the same trajectory.
You probably remember Taser (TASR). The company’s “conducted electrical weapons” (stun guns) were high profile a few years back. By causing neuromuscular incapacitation, Taser’s products help police officers control suspects, in the process reducing the use of firearms and reducing fatalities. Nevertheless, they are still controversial in some circles. While it’s legal to carry a Taser in 45 states, you can’t own them in Washington, D.C., Hawaii, New Jersey, New York, Massachusetts and Rhode Island.
Taser first made a big splash a decade ago. It came public in 2001, and by 2003, it was a hot stock, climbing higher as more and more people became aware of the company. Cabot Market Letter recommended the stock in November 2003 when it was reading at 60. In February, there was a three-for-one split, reducing the cost of our position to 20. And in April, after the stock had peaked at 128, and then sold off on heavy volume after an earnings report, we sold half, locking in a five-month profit of 296%! The remainder of the position was sold over the next four months, as the bulls and bears pulled TASR this way and that, but the top was in.
In the 10 years since, Taser’s revenues have nearly doubled, from $68 million to $115 million. The company has lost two product liability suits, but it’s continued to improve its products, which have helped law enforcement communities across the country do their jobs more safely.
Also, the company has fallen totally out of the limelight, which means it’s ready to rise again!
And Taser IS rising, thanks to its second act.
Here’s what Mike Cintolo wrote recently in Cabot Top Ten Trader.
“Taser International is the maker of the stun gun that’s used by military, police and a few civilian consumers as a non-lethal way to subdue attackers or fugitives. Sales growth was strong in 2006 and 2007, but fizzled out from 2008 through 2011. Taser needed to find a new product to augment its successful, but stagnant, lineup of electroshock weapons, and it looks like it has. The new product lines are 1) body cameras that will worn by police officers to record evidence and 2) a Cloud-based evidence management system called EVIDENCE.com that will collect evidence taken on cell phones, from photos to audio recordings to video interviews and manage it by category, case number and via automatic GPS tagging. The company’s Q3 earnings report on October 30 was much stronger than analysts had expected, showing a 43% jump in earnings per share on 22% growth in revenue. Sales of the company’s wearable cameras and EVIDENCE.com service soared 112%. Taser has always had a bit of a one-product perception problem, but its new products promise a more robust upside than just sales of Taser guns and subsequent sales of cartridges.”
In short, while Taser’s non-lethal weapons had, and still have, an image problem in some circles, the new product line, EVIDENCE, falls smack into the confluence of the security/surveillance/big data industries, where it’s all about making people safer, and no one gets hurt.
And the stock is once again hot!
TASR blasted off a base at 9 in August and just two weeks ago hit a high of 18, for a 100% gain. Right now it’s on a modest pullback, but I think there’s far more upside ahead, if Taser can execute, and get its story out to investors.
Mike, as usual, gave his readers some specific advice about buying, and if you’d like to see it, all you need to do is click here.
Yours in pursuit of wisdom and wealth,
Chief Analyst of Cabot Stock of the Month
and Publisher of Cabot Wealth Advisory