Is Tesla The Best Short In The Market?

Tesla Motors Inc TSLA shares plummeted nearly 9 percent on Thursday following the company’s Q2 earnings report. The company’s earnings per share (EPS) number actually beat Wall Street consensus estimates for the quarter, so why is the stock dropping?

Q2 Issues

The biggest issue with the Q2 earnings report appears to be the company altering its expected number of 2015 automobile deliveries estimate from 55,000 to a range between 50,000 and 55,000. Growth is the major selling point for Tesla’s stock at its current share price, and any indication that growth may not be as strong as expected is taken very harshly by the market.

Bank of America analyst John Murphy estimates that Tesla’s EPS loss of $0.48 is actually closer to a loss of $0.79 when regulatory credits and forex benefits are taken out of the equation.

Valuation

Even after the big drop, Tesla’s stock still looks extremely overvalued based on many traditional fundamental metrics. Starting at the most basic level, Tesla is not turning a profit. The company has a net income of about -$400 million over the last four quarters.

While the general argument for buying Tesla shares has to do with looking toward the future, even the company’s forward price to earnings ratio of about 71.1 is extremely high compared to the S&P 500’s forward P/E of about 17.8.

It’s hard to find a true peer for Tesla, but whether you go the auto route with companies like General Motors Co GM and Ford Motor Co F or the tech route with companies such as Apple Inc. AAPL and Google Inc GOOG GOOGL, Tesla looks overpriced by comparison.

Cash Flow

When a company reinvests a large portion of earnings back into the company for the purpose of expanding operations and growing the business, earnings numbers aren’t the best measure of a company’s performance or a stock’s value.

Instead, investors may choose to focus on cash flow from operations, which indicates how much cash a company generates from regular business activities.

Unfortunately for Tesla shareholders, not only is Tesla generating negative cash flow from operations, the magnitude of the losses have grown each of the last four quarters.

Tesla’s cash burn has gotten so bad that Bank of America believes that “a capital raise could be necessary soon.”

Takeaway

Tesla is certainly an exciting company that will likely play a big role in the future of the global auto landscape. However, excitement may not be enough to keep Tesla’s share price at its current level if the company doesn’t begin to turn around its fundamental performance.