Tesla Motors: The Momentum Rally Just Ended
Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Stocks opened higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.5% and 0.66%, respectively at 10:15 a.m. EST.
Yesterday morning, in the run-up to niche automaker Tesla Motor's third-quarter results, I wrote, "While I think individual investors are unlikely to come out ahead by trying to 'game' the earnings, betting on a beat or a miss, I think there is every chance that the stock will be volatile in the wake of the release, during today's after-hours session and tomorrow."
Once in a while, I get things right. That's certainly the way things are playing out: The shares were down 12.3% at the end of yesterday's after-hours session, and the same loss is largely reflected in this morning's trading.
On the bright side, Tesla Motors did beat analysts' expectations for a breakeven quarter with a $0.12 per-share profit (ex-items). Furthermore, vehicle gross margin excluding zero-emission vehicle credits (the profit margin per car, roughly speaking) rose to a record 21% -- and better yet, the company says it's on track to achieve 25% in the current quarter.
However, the fourth-quarter guidance that the company provided in its shareholder letter may have soured the market on the stock -- specifically, the section in which the automaker said: "We expect our non-GAAP profitability to be about consistent with Q3. ... Free cash flow is expected to be close to breakeven." In the third quarter, Tesla generated $26 million in free cash flow.
Worse still, investors who were looking to 2014 for any significant cash flow will have been disappointed: CEO Elon Musk told investors and analysts on the earnings call that the company expects to generate a bit of positive cash flow next year. Remember, folks, a company's valuation is ultimately tethered to expected future cash flows, and these cash flows may be starting to look a long way off to Tesla shareholders. Meanwhile, you hardly need a telescopic lens to catch a glance of the stock's valuation -- at 185 times estimated earnings per share over the next 12 months, it looms very large indeed.
Tesla Motors' stock has had a stunning run in 2013, up 400% as yesterday's close. Elon Musk recently told CNBC that the market "is being very generous [with Tesla's value]." It looks like we may be testing the limits of that generosity as the market adopts a more reciprocal "show me" attitude toward Tesla's results.
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The article Tesla Motors: The Momentum Rally Just Ended originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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