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David Robinson: The tide turns on Tesla's stock

The tide has turned on Tesla Inc. – and the turnaround shows just how precarious investors think the electric vehicle maker’s business is.

Less than a month ago, Tesla's stock was riding high. Almost certainly too high for a company that lost $685 million last year and sold 85,000 luxury electric vehicles.

No matter. Until Thursday, it was worth more on Wall Street than General Motors, which sold 9 million vehicles last year and turned a $9 billion profit.

Wall Street is all about the future, and many investors saw Tesla as being at the center of a world where electric vehicles supplant gasoline-powered cars and trucks on highways across the globe.

They focused on the upcoming launch of Tesla’s new mass-market electric vehicle – its most affordable model, the Model 3 sedan, with a starting price of $35,000.

And they bought into the vision of Tesla’s CEO Elon Musk and his plan to turn the company into a renewable energy superpower, built around the Model 3, the solar panels it plans to make at its SolarCity factory in Buffalo and the batteries that both power the vehicles and store the solar array’s electricity.

But when a stock rises as fast and as high as Tesla’s has since Thanksgiving, it only takes a modest disappointment for investors to start bailing out of a high-flying stock. And that’s what happened this week, after the company said production problems with the batteries it makes for its vehicles caused second-quarter vehicle deliveries to come in below expectations.

Investors who were expecting growing sales were disappointed that Tesla delivered slightly fewer of its existing luxury models during the second quarter as it did during the first. It was only a shortfall of about 3,000 vehicles – 22,000 deliveries instead of the 25,000 that analysts expected – but it was enough to rattle investors and shift their focus from Tesla’s potential upside to its possible downside. And that includes worrying about Tesla facing new competition in the electric vehicle market it now dominates.

For a company that has only turned two quarterly profits in the seven years since it went public and carries a sky-high valuation based more on promises than result, the margin for error is razor thin. And last week’s disappointment was too much for many investors to bear, prompting a wave of selling that slashed the value of Tesla shares by more than 13 percent. By Thursday, GM was the nation’s most valuable auto maker once again.

While most investors focus on Tesla’s much larger auto and battery-making businesses, the sell-off also cast a shadow over the company’s money-losing solar energy business, SolarCity, which is planning to open a massive solar panel factory in Buffalo this year. The sell-off wasn’t about SolarCity, but for Musk to deliver on his dream of creating a renewable energy juggernaut, he needs Tesla’s car business to grow rapidly, behind the Model 3, and push the company closer toward becoming profitable.

The meteoric rise by Tesla’s stock was a sign that investors were buying into Musk’s vision.

Its tumble this week was a sign that other investors are equally wary of Musk’s ability to pull off three massive projects all at once – the launch of a mass-market electric vehicle, ramping up a massive battery factory in Nevada and opening the biggest solar panel factory in the Western Hemisphere in Buffalo.

“We see Tesla shares as an over-valued, show-me story,” said Cowen & Co. analyst Jeffrey Osborne in a research note.

The disappointing deliveries also fanned fears by some analysts that it is a sign that demand for its Model S and Model X luxury models that sell for $75,000 and up is plateauing.

But it also overshadowed nuggets of good news in the same report, including the start of Model 3 production on Friday and plans to deliver the first 30 vehicles by the end of the month. Musk said production would ramp up to 20,000 vehicles a month by December, although that was less than previous forecasts.

The delivery report “raised more questions than answers, particularly about Model S and Model X demand,” said Bernstein analyst Toni Sacconaghi.

Osborne said the forecast that Model 3 production could reach 5,000 a week by December seems aggressive.

Tesla’s drop also was accelerated by other developments last week.

Volvo said it will start making only hybrid or electric vehicles beginning in 2019, with plans to launch five fully electric models between 2019 and 2021. While Volvo is just a tiny player in the global car market, the move is a signal that the electric vehicle market, which already includes the Chevrolet Bolt, will become more competitive in the coming years. Both Ford and Audi plan to launch electric vehicles by 2020.

There was further disappointment Thursday, when the Insurance Institute for Highway Safety said its Model S received only an acceptable rating in one of its crash tests, not the more coveted Top Safety Pick rating.

All this fueled the sell-off. While Tesla’s stock still is up nearly 47 percent for the year, analysts are expecting Tesla’s shares to keep falling, too, despite the more than 1 percent rebound in its stock price on Friday. The average price target among 24 analysts surveyed by FactSet Research is $284, or 9 percent less than Tesla’s current share price.

The outlook for Tesla’s shares was much different as recently as last November. Its shares then traded for only a little more than $180, with investors shaken by a fatal crash involving a Model S sedan that was in its self-driving mode. That made some shareholders wary of the highly touted autopilot feature. Investors also were concerned that the SolarCity acquisition would prove to be a financial drain on Tesla at a time when it needed billions of dollars for the Model 3 launch and the battery gigafactory.

But investors started to take a more upbeat view after Thanksgiving, focusing on the promise of the Model 3 and showing confidence in Musk’s forecast that Tesla’s deliveries could rise six-fold to more than 500,000 vehicles a year by 2018. By mid-June, Tesla’s stock more than doubled, peaking at nearly $387.

The heady times didn’t last, with the delivery disappointment setting off a new wave of selling, chopping more than $11 billion off the electric vehicle maker’s market value in just two weeks as the tide of investor sentiment turned against Tesla.

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