My sister sent me this in Barron’s today (I don’t have a link to it).
“Teresa Rivas
July 18, 2018 3:32 p.m. ET
From
Elon Musk's lively Twitter presence to worries about
self-driving cars, there's no shortage of headlines that tie back to
Tesla (TSLA). Yet plenty of bulls argue that investors should tune out the noise: Once the electric-car maker starts turning in regular quarterly profits, that's all that will matter. Faith in Musk and the product will be vindicated, the company will be less beholden to debt markets, and the stock will rise.
Or will it?
Datatrek's Nicolas Colas thinks not. If Tesla starts delivering consistent earnings, investors will start to value it like a car maker–a high-growth auto firm, for sure, but a car maker nonetheless. And that doesn't do great things for a stock's valuation. "And after looking at that sector for more than 25 years, we know where that leads: multiple erosion as markets deliberate, 'Is Tesla really 20 times better than
General Motors (GM) on a multiple basis, or just 10 times better?'” Colas writes in a report published today.
Then there's the fact that Tesla, like other big companies, will ultimately find itself hampered by its size. Stock "multiples tend to contract as already large companies grow their market share. You can only get to 100%, after all," he writes.
What's fueled Tesla's rise so far, Colas posits, is that markets have been valuing the stock the way a venture capital firm eyes up a new prospect, looking not for steady earnings, but disruption potential and swift user adoption. In this world, moving toward a stage where a company starts reporting regular earnings signals a shift in its evolution that may not be as appealing. "Profits that approximate the company’s cost of capital only occur when the business has ended its explosive growth phase and can’t scale into new opportunities. Then, rather than seeing the stock rise further in celebration of strong earnings, the vultures start to circle."
Tesla is scheduled to report earnings on Aug. 1, and analysts expect it to lose $2.73 a share. Hooray?”