The great story stocks always outrun their fundamentals as investors pile into what they are sure will be the next Apple or Wal-Mart. The search for companies capable of transforming their particular businesses and crushing the competition drives the dreamers and momentum players. Most of these stocks rarely live up to the hype, nor the hope.
Sometimes, there aren't even any fundamentals to outrun, although that's not the case for Tesla Motors and its brilliant founder, Elon Musk. With record sales of its Model S electric cars, the startup auto maker's revenue soared to $431-million (U.S.) in the latest quarter from a mere $50-million a year earlier. Its net loss shrank to $38-million, or 32 cents a share, from $110-million ($1.05 a share). Which was better than the consensus.
But sales fell short of market expectations and production remains below optimal levels because of a shortage of battery cells. What's more, adjusted profit will remain at or near the current 10 cents a share in the next quarter. The company also faces the loss of a nice little sideline – selling environmental credits to other auto makers to meet regulations for zero emissions set by California and a handful of other states. The credit transfers brought in more than $50-million in the second quarter, but that was down to $10-million by the third quarter, as car makers ramp up their own rechargeable products.
Some Tesla investors started heading for the exits, causing the volatile stock to plunge nearly 15 per cent Wednesday. Yet it still trades at almost 4.5 times its level at the end of last year, and its market cap stands at $18.4-billion. That's more than a third of the market cap for General Motors, with less than 1 per cent of its sales.
People love the idea of a stylish, all-electric vehicle capable of driving the fossil-fuel fossils off the road and into eventual oblivion. What makes the story even more compelling is that the cars work and they sell, in admittedly limited volumes, to consumers with deep pockets. But for Tesla to be any more than a cool, costly niche player in the growing green car market, it's going to have to ramp up production dramatically while slashing costs, delivering lower-priced models and ensuring ease of recharging and repair.
The company intends to expand its product range next year with a vehicle designed for the popular crossover market. It also has plans for heavy infrastructure spending to expand its network of charging stations across the United States, Canada and Europe.
But the company must slash the time customers have to spend recharging their batteries. And even that won't help Mr. Musk – or other shareholders – achieve his lofty goals, if Tesla flunks its crucial test of delivering a considerably cheaper mass-market car capable of stealing market share from the industry heavyweights.
If that doesn't happen, this story won't have a happy ending for investors paying through the nose for all that promise.