Tesla Motors Inc. suffered its biggest one-month loss of market value in October amid concern among some investors that a fivefold stock-price surge outpaced the growth prospects for Elon Musk’s electric-car company.
Tesla dropped 17 percent in October, its first monthly decline since February and biggest since December 2010. That cut the market capitalization for the Palo Alto, California-based carmaker to $19.4 billion from its peak of $23.5 billion on Sept. 30. The $4.1 billion decline in value exceeds its $4 billion market valuation at the start of 2013.
While investors have been willing to give the company a valuation of 262 times estimated earnings, it faces a number of challenges. Among them: boosting production, successfully selling the Model S sedan in Europe and Asia, enlarging a small network of company-run stores and adding an electric sport-utility vehicle, all while avoiding defects and delays that anger customers and could harm its reputation.
“The stock is priced to perfection right now,” said Ben Kallo, an equity analyst for Robert W. Baird & Co. in San Francisco, who last month lowered his rating to neutral from outperform.
Tesla suffered two accidents that ended in fires -- first in Washington state on Oct. 1 and then in Mexico on Oct. 18. While neither trigged investigations by U.S. safety officials, they happened as some investors were already questioning if the stock had gone too far too fast. Tesla dropped 10 percent over two days following the Washington crash report.
The carmaker also faces a potential drop in revenue from zero-emission vehicle credits generated in California that buoyed its first quarterly profits. Regulators are considering revisions to the state program that would cut the number of credits Tesla gets for the Model S -- and sells to large automakers -- by as much as 40 percent from 2015.
“There’s perhaps a growing view that significant cash earn in 2013 is likely to turn to significant cash burn in 2014,” said James Albertine, an analyst with Stifel Equity Research in Baltimore, who rates Tesla a hold.
Demands on company funds include development costs for the Model X crossover and lower-priced “Gen 3” sedan, expansion of stores and Tesla’s exclusive charging network and international distribution, Albertine said.
Tesla rose 1.4 percent to $162.17 at the close today in New York, raising its market capitalization to $19.7 billion. Even with the October decline, shares of the carmaker named for inventor Nikola Tesla has surged more than fourfold this year, the most among more than 1,000 companies in the Russell 1000 Index, which has gained 24 percent.
Tesla’s market value still outranks that of Fiat SpA, the majority owner of Chrysler Group LLC, at 7 billion euros ($9.4 billion), as well as Alcoa Inc., the largest U.S. aluminum maker, at $9.9 billion.
Tesla’s 379 percent increase this year is also more than 10 times that of General Motors Co. and Ford Motor Co., each of which has increased 30 percent in 2013.
Tesla promotes its flagship Model S, priced from about $70,000 to more than $100,000, as the “safest car in America” after the vehicle got top crash test results in every category tested by U.S. safety officials.
The National Highway Traffic Safety Administration said Oct. 24 it found no evidence the Model S fire on a Washington state highway resulted from defects or violations of U.S. safety standards. In that Oct. 1 incident, the car struck metal debris that pierced its lithium-ion battery pack, according to state officials and Tesla.
The U.S. safety agency said it’s aware of the incident near Merida, Mexico, and will continue to monitor the performance of Tesla vehicles. NHTSA doesn’t investigate vehicle accidents that occur outside the U.S., the agency said.
The stock’s closing price peaked at $193.37 on Sept. 30, a level that may have encouraged some shareholders to sell, said Kallo and Stifel’s Albertine.
“Any move to sell was compounded by the first fire,” Kallo said. “The second fire didn’t help at all.”
“The vast majority of our investors understand that things like this happen,” said Jeff Evanson, a Tesla spokesman. “I never ask the reasons why any of them sell.”
Musk, Tesla’s outspoken 42-year-old co-founder and biggest investor, may have also played a role in the stock’s October decline. After trading barbs with investors who have shorted Tesla shares this year in the belief the stock is overvalued, Musk appeared to acknowledge as much in interviews last month.
“The stock price that we have is more than we have any right to deserve,” Musk told Bloomberg Television in London last month. “It’s difficult to predict where it goes in the short to medium term, but I do feel good about having the company achieve that value and more in the long term.”
Such remarks have an impact on investors who have a bearish view of Tesla, Kallo said.
“Elon has been very responsive to car owners and stakeholders,” Kallo said. “I think he also doesn’t want them to get too far over their skis, in a sense.”
John Lovallo, a Bank of America Merrill Lynch analyst, has said since September that the shares were “long overdue” for a price decline and rates the stock underperform.
“We have written extensively on our view that Tesla’s shares are vastly overvalued from a fundamental standpoint,” Lovallo said in an Oct. 23 report. “Thus far we have largely been howling at the moon, but believe it is worth considering what could occur when sentiment behind a momentum driven stock shifts.”
Short interest in Tesla was 11 percent of shares outstanding on Oct. 29, down from a record 25 percent in September 2012, according to data compiled by Bloomberg and Markit, a London-based research firm.
That compares with a 2.9 percent average for companies in the Russell 1000 Index, where the stock is among the most shorted. About 51 percent of Tesla shares available for lending have been borrowed by investors, the first step in a short sale, in which a trader tries to profit from a decline. That’s down from more than 90 percent last year.
Tesla will update its 2013 plans and outlook for next year on Nov. 5, when it releases third-quarter results. The company may report a profit of 11 cents a share excluding some items, the average of 11 analysts surveyed by Bloomberg. That would be the third consecutive quarterly profit for the carmaker that only had losses until this year.
Model S deliveries to Europe expanded through the quarter, and Tesla has said it plans to also begin sending cars to Asia by the end of 2013.
Musk has set a goal of delivering 21,000 units of Model S this year, almost 10 times the year-earlier volume.
“It’s had such a fast move and got to such a big market cap this year,” Kallo said. “They’ve set aggressive targets and have to keep hitting them.”