Tesla is a story stock with extreme upside momentum. If you are among those who have been complaining the stock was too high to buy and you were “waiting for a dip,” don’t say you never had one.
Buying dips in story stocks, however, is not as easy as it sounds. It usually means buying during a period of extreme uncertainty, when the company’s core business model is called into question (think Netflix). Nervous holders take profits on the rumors; that’s how dips are created.
The Tesla Story
A core premise of the Tesla Story is that the company is supply-constrained, not demand constrained. Shares have declined about 20% over the last two months amid rumors of sluggish sales in Germany and softening demand in the U.S. Skeptics who are short TSLA are busy blogging about the risks and over-valuation.
The plot thickens because Tesla reports Q1 earnings on May 7 and there’s a good chance management will miss the consensus estimate.
In Q4, Tesla trounced consensus non-GAAP estimates of $0.21 by more than 50% on robust sales of 6,800 vehicles. This quarter, however, analysts expect Non-GAAP earnings of $0.12 a share on sales of 6,400 Model S sedans. The bar is low, but if management fails to beat, the Tesla Story will take a hit.
Pay to Play
If Tesla follows its stated guidance and spends 15% more this quarter while sales volume, margins and ASP stay the same, the company is going to miss the $0.12 per share earnings target and report single-digit non-GAAP results. Ouch!
Why is this likely? The average selling price should be about the same this quarter ($107,000), as customers covet extras such as the speedy Performance package. In the Q4 conference call, however, management guided for a 15% increase in operating expenses in Q1. The reason: China.
Tesla expects to sell as many cars in China as in the U.S. over time, but charging infrastructure is lacking and in order to do business on a large scale in China one has to pay to play. At a ceremony in Beijing marking the first delivery of a Model S sedan, Elon Musk remarked that “My instructions to the team are to spend money as fast as they can spend it without wasting it.” You get the picture.
How to Play It
Management has two options.
1) Take the earnings hit and focus on the second half story. If this happens, the stock is likely to re-test the $186 level.
2) Use a bit of creative accounting and beat the Street. If this happens, the dip will be over and I doubt shares of Tesla will ever see $186 again.
I suspect that Musk will elect Option #2. In the Q4 conference call, he noted that the company’s sales figures were conservative because management did not count vehicles in transit as sales. Choosing Door #2 may give management a way out and enable them to beat on both sales and earnings, even if only marginally. Marginally is fine.
If Musk elects the second option he will be taking a page from the AAPL earnings playbook. Apple consistently guided low and beat estimates by a penny or two quarter after quarter. More importantly, he will buy time and keep the Tesla Story alive and well for another quarter.
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