Tesla Stock’s 3 Big Issues After The Stock Split

It’s hard to complain about stocks that go straight up, more or less, in price. It’s the dream of every investor to find them and then to brag endlessly about their genius in identifying them. Tesla
TSLA
is the latest example of slightly crazed buying in a single equity that nothing can hold back.

There’s no question that CEO Elon Musk is one of the great business innovators, creating the first no-gasoline-needed car that found a market and established a brand name. Those short sellers who question Tesla’s long-term prospects keep getting frustrated by the stock’s ability to keep reaching the sky.

Monday’s stock split is a meaningless exercise: investors end up with more shares for the same amount of money. Big deal. Tesla gets a few headlines but nothing of substance is accomplished from the standpoint of profitability or growth.

Meantime, here are 3 issues many of the car company’s most enthusiastic supporters seem to want to ignore.

Tesla’s price/earnings ratio is insanely and ridiculously high: 1,100. Come on now. The forward p/e, based on something called “expected earnings,” is a mere 140, of course, but how much more reasonable is that, really?

The Shiller p/e of the Standard and Poor’s 500 now sits at 30 which by itself is historically on the “rather high” side to begin with. The price/earnings ratio for Apple
AAPL
is 38. Microsoft
MSFT
is coming in these days at 39.

Tesla’s multiple of 1,100 suggests investors believe that Elon Musk will be bringing back gold from his mines on Mars by sometime next year and that the value of the metals will be showing up on the company’s bottom line right away.

This is not to say the price/earnings ratios are the key to investing. It’s just one metric among many for determining valuation, but it’s the most classically used of the metrics from Benjamin Graham and Warren Buffett on down.

Competition to Tesla is here and it’s been here for awhile. High-end and middle-brow electric and hybrid gas/electric powered can be purchased from a number of established car makers.

Ford, General Motors
GM
and Honda are involved. Those taking direct aim at the firm Tesla grip on the real luxury market include Porsche with the Taycan — and Lexus with their ES Hybrid.

While Musk has created the name brand that seems to most clearly identify newness and style, history tends to demonstrate that others eventually take on and meet the challenge of offering marketable alternatives to the original concept.

Some Tesla investors have difficulty even comprehending the idea of actual competition to their favorite, highly-profitable portfolio addition. It may take months or years but highly competitive operations are underway to grab market share away.

Hot stock syndrome. If you’ve been around for a few years, you’ve seen this before: during the most heated phase of a bull market, one stock becomes so highly recognized as the hottest one that everyone you meet knows its name and the basics of its story. Right now, that’s Tesla.

Inside the Wall Street community and outside, it’s the growth stock to end all growth stocks. Since it just keeps going up (so far), analysts are pressured to include it among their “buy” recommendations, so as not to be left behind.

Robinhood traders, many of them new to the stock market and to trading, find in Tesla their dream of apparently endless profits. They have yet to experience the other side of a bull market and confidently go in with much less caution than might be merited.

On the arrival of Tesla’s 5-for-1 stock split, it’s probably wise to take these factors into consideration. Can it keep going up in price despite all of this? Of course it can. Hot stocks have a way of continuing upward despite all obstacles until, finally, they don’t — welcome to the stock market.

Stats courtesy of FinViz.com.

I do not hold positions in these investments. No recommendations are made one way or the other.  If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.