The Biggest Threat To Tesla's Stock Price Is The Very Notion Of Profitability

Don't use the P-word around Elon.
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By Heisenberg Media (Flickr: Elon Musk - The Summit 2013) [CC BY 2.0], via Wikimedia Commons

By Heisenberg Media (Flickr: Elon Musk - The Summit 2013) [CC BY 2.0], via Wikimedia Commons

Here's a brief anecdote that illustrates what it's like to be a Tesla shareholder.

On Monday, Tesla's official Twitter account implored followers to “Send us questions today for Elon to answer at our Shareholders Meeting tomorrow.” Queries streamed in, many of them concerning the timeline of the Model 3 rollout and other consequential topics. A few hours later, Elon Musk hopped online and chose to answer just one of the questions: “Boxers or briefs?” His response:

If you're a Tesla shareholder and you want some clarity into the business operations of the electric-car-maker-slash-energy-company-of-the-future-slash-dream-merchant: lol. But if you want a slice of that disarming Muskovite charm, you're in the right place.

The miracle of Tesla is that this formula actually works. Distract shareholders from the even the faintest suggestion that the company might someday generate what shareholders ostensibly desire (profits) and instead ride on a wave of wave of faith, a commodity that is far easier to produce. Which gets us to this:

In a report published Monday, Pacific Crest analysts raised their bull-case price target on Tesla shares to $439 because of low expectations for the Model 3. But the firm is keeping a sector-weight rating for the stock as it looks further into the future.

They think investors will ignore Tesla’s lack of profitability until 2018, sending the stock higher the rest of this year as excitement grows with the development of the Model 3, a $35,000 electric car that the company hopes broadens its appeal.

Fewer phenomena better illustrate the logic-bending appeal of Tesla than the fact that dampened sales expectations might be sending shares up. But it's not an unreasonable theory. If profitability is a concern less pressing than how Musk girds his loins, we can wave away what for a normal stock might be a big headwind: concerns over sales figures for the company's most crucial product release yet. What matters instead is sentiment, a metric best reflected in Tesla's stock price. Currently, sentiment looks good. Thus, buy Tesla. And repeat.

Of course, this pattern will change at some point:

“We believe optimism in the name will become more muted once investors return to judging the company on demand, growth and profitability,” Pacific Crest’s Brad Erickson and Elliot Arnson wrote.

Pacific Crest sees Tesla investors getting judgy about profits in 2018, but it's hard to say why. Sure, Tesla investors will care at some point, but there's no particular reason why 2018 will be that time. If we wanted to be more specific, we'd say that Tesla investors will care about profits once the current Tesla narrative runs its course. Once people begin tire of the Tesla story – a brashly innovative company foregoing typical corporate practice in pursuit of a transformed economy – then the typical business narrative will take hold – i.e., the story where you sell things for more than you paid to build them and reward shareholders with the difference. But the latter remains a radical departure for Tesla's investors.

When Will Tesla Profits Become Relevant To Investors? [WSJ]

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