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The one chart that should give Tesla investors a panic attack

If you follow comments from Tesla’s CEO Elon Musk, you already know Tesla’s biggest problem is keeping up with incredible demand for the company’s cars. Analysts, however, are starting to call foul. John Lovallo (Bank of America Merrill Lynch) went so far as to lower his price target on the stock to $65 based on what he says are demand problems at Tesla.

Is the market really overvaluing Tesla by almost 70 percent? If you believe numbers from Paulo Santos, Think Finance (source), perhaps it is. Here’s a chart showing Tesla’s production through Q4 of 2015, along with Santos’ estimate for Q1 in 2015:

tesla-production-numbers-chart-2015

“Tesla’s management and the bulls consistently argue that the company can stimulate demand at will and that the true issue is capacity and supply,” Lovallo writes. “In our view, this optimistic thesis has been largely debunked, given that we now know Tesla is producing at levels that are both well below past run-rates and the company’s current installed capacity. In other words, Tesla appears to be pulling back on production, which we believe could create the appearance of rising demand” (source).

CEOs can be overly-optimistic – visionary even, which I’d argue Musk is – but numbers are the only yardstick we have to measure supply and demand for Tesla’s cars. If the company’s production numbers are shrinking in the face of rising demand, then there’s an operational problem at Tesla that needs fixed.

If production numbers are slipping because the company needs to demonstrate demand for its vehicles, there’s a serious problem that could lead to a massive plunge in Tesla’s stock price.

Tesla’s forecasting production of 55,000 vehicles in 2015. That’s 57 percent more than the 35,000 cars they produced last year. If Tesla produces 10,000 cars in Q1 (as Santos predicts), it’s on pace to produce just 40,000 cars in 2015. That’d be a 14 percent increase over last year’s numbers. That’s meaningful growth for a more mature company, but it certainly wouldn’t justify Tesla’s price multiples.

Tesla’s true Q1 production numbers may be the most closely watched metric in the company’s next earnings report. They can say whatever they’d like about demand, but the proof is in the number of Model S sedans that roll off the line.

Tesla’s planning to start production on its Model X this fall. It’ll be interesting to see what happens. If the company can boost Model S production while concurrently launching the Model X, the company will go a long way toward silencing the Lovallos of the world. If the Model X is delayed, and Model S production numbers sag, look for the shorts to have a heyday on TSLA.

Tesla heading for a 68 percent plunge?

If you’re looking for all the bearish arguments against Tesla (TSLA), look no further than analyst John Lovallo of Bank of America Merrill Lynch. Earlier this week, he lowered his price target for the electric car maker from $70 to $65 (per Business Insider). That’s 68 percent less than the stock’s trading at right now (around $204)!

Lovallo believes Tesla’s grossly over-valued for one reason: lack of demand. Tsk-tsk, says Tesla CEO Elon Musk. Demand’s not he problem, supply is. Why then, Lovallo wonders, are Tesla’s factories underutilized?

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Is Apple really going to manufacture an Apple Car?

Speculation’s running rampant that Apple’s angling to get into the automotive industry. There are two theories here:

  1. Apple wants to make its own car.
  2. Apple’s working on software for autonomous or semi-autonomous vehicles.

On the face of it, the idea of software for self-driving or partially self-driving cars seems more likely. But it’s unclear if Apple’s content to stop there. Let’s look at the facts we do have.

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Netflix (NFLX) shares in a bear market?

Netflix (NFLX) shares have been streaming downward over the past month with the stock shedding 20 percent of its value in 30 days. What’s the standard definition of a bear market? A price decline of 20 percent or more.

What gives? There’s been a barrage of issues plaguing the stock, but I pin the rapid decline on four factors:

1) Profit-taking. Netflix was the best-performing stock in the S&P 500 last year rocketing up more than 300 percent. Weakness in 2014 means big investors are taking profits.

2) Apple + Comcast + Amazon. Rumors about Netflix’s competitors continue to swirl. Apparently, Apple (AAPL) in talks with Comcast (CMCSA) to form a joint video-streaming service. In addition, Amazon’s planning to offer free (yes, free!) streaming content to all web users.

3) Market correction. It’s been risk-off in the market this month, and the Nasdaq in particular has gotten hit hard. While conservative stocks have held up relatively well, tech leaders and biotechs plummeted (Netflix included).

4) New expenses. In the near-term, it looks like net neutrality is going out the window. The two companies that are going to get hit harder than any others by that are Google (thanks to YouTube) and Netflix. Exact costs are unclear, but they won’t be trivial.

These factors have some forecasters poo-pooing Netflix. Wedbush, for instance, just reiterated its $175 price target for Netflix over the next year. That would be a decline of more than 50 percent from current levels.

A stock’s ‘sex appeal’ plays big role in price

Last summer, a friend of mine asked me what I thought about investing in Tesla (TSLA). At the time, Tesla had shot up from $30 to north of $100. It was up more than 250 percent in the space of a few months. I told my friend we’d missed the boat. The stock had run too far too fast.

Boy was I wrong. Telsa has more than doubled since then. And that leads me to my thesis for this post: investors greatly underestimate a stock’s ‘sex appeal’ when they’re trying to value a company. There are a handful of companies that have something special: a great niche at precisely the right point in history, a compelling story or a truly revolutionary idea. Those stocks don’t trade on reason and numbers alone. They trade on beliefs, ‘gut feelings’ and a desire for change in the world. Put another way, they trade on hope, hype and hot air.

And yet, we can’t discount the power of a transformative company or CEO to grow into incredibly high expectations for a stock. The example I like to give is Amazon (AMZN). People complain about the valuation of a company like Facebook (FB), which is trading at a P/E of 92. But people aren’t that surprised Amazon’s trading at a P/E of 587!

And yet, Amazon is one of the few tech stocks that’s trading well above it’s dot-com highs from the late 1990s. 15 years ago, Amazon was just an online bookseller. Today, it’s a retail shopping giant, a media powerhouse for online movies, music and books, a hardware manufacturer, a cloud hosting company and a database of product reviews that’s unrivaled. Amazon has lived up to the hype.

Not every company lives up to the hype, of course, but you can’t deny that a few companies do. With that in mind, here’s my stab at a list of the Top 12 stocks with the biggest ‘sex appeal’ right now:

  1. Tesla (TSLA)
  2. Facebook (FB)
  3. Netflix (NFLX)
  4. Amazon (AMZN)
  5. Twitter (TWTR)
  6. Plug Power (PLUG)
  7. Pandora (P)
  8. RF Micro Devices (RFMD)
  9. Under Armour (UA)
  10. NQ Mobile Ads (NQ)
  11. 3D Systems (DDD)
  12. HEMP (HEMP)

I’m going to start blogging more about each of them regularly in the future so stay tuned!

Three reasons to invest in the Shutterstock IPO

While you might not be familiar with Shutterstock, you’ve probably seen their wares on the internet, book covers or posters hundreds of times. Shutterstock operates a stock photo site which lets subscribers download pictures to print or post online next to news articles, and/or as part of a Web site’s design. All told, Shutterstock has some 19 million photographs and graphics available to license for online and print use.

While the company may not be the most glamorous tech company vying for investor dollars, but I still think buying shares makes sense. Here are three reasons why:

1) The subscription model. Unlike some of its competitors, Shutterstock really pushes its subscription model. That means customers keep ponying up as much as $250 a month to use the service. Not only does a subscription model breed long-term business relationships, it’s a more reliable revenue stream than the advertising dollars that most websites compete for. The proof is in the pudding. For the year ended 2011, Shutterstock earned 21.8 million on a revenue of $120.2 million (per the company’s S1 filing).

2) Powerful growth. Revenue at Shutterstock grew 44.5 percent in 2011 – not just in the U.S. but around the world:

And the company is in an industry that’s experiencing tremendous growth. BCC Research estimated the online image marketplaces would grow 51 percent a year between 2008 and 2013 to a total of $2.0 billion in 2013. With more than 32 percent of U.S. businesses still without a web site (and millions of potential customers in countries like China), Shutterstock should be able to sustain double-digit growth for years to come.

3) Consolidation, anyone? While Getty Images dominates the stock photo industry thanks to its strong ties to newspapers, Shutterstock could give the company a run for its money by acquiring some of its competitors. Indeed, that could be exactly what Shutterstock execs have in mind.

“We may use all or a portion of the net (IPO) proceeds to acquire or invest in complementary companies, products or technologies, although we currently do not have any acquisitions or investments planned,” Shutterstock writes in its S1 filing. If it can acquire one or two key competitors, the company will be able to quickly ramp up profits – and look to establish itself as a long-term player in the stock photo business. I’d be nervous if I were Getty.

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Three reasons to invest in the Alibaba IPO

Now that Yahoo Inc.’s (NASDAQ:YHOO) freeing up 20 percent of Alibaba’s shares, the Chinese tech giant Alibaba can begin preparing for its IPO. Expect a lot of fireworks as Alibaba’s one of the most exciting tech companies behind the Great Firewall. Here are three reasons to consider investing in the Alibaba IPO:

1) Fingers in a lot of pots. Summing up Alibaba’s internet operations is a bit like trying to describe Microsoft’s software offerings. They both do a hell of a lot. Alibaba’s most promising properties, though, are Alibaba.com (a business-to-business commerce site), Taobao.com (an eBay-like auction and Buy It Now site), eTao.com (a shopping search engine similar to Google Products), a cloud computing division, and Alipay (a PayPal-like payment processor for online transactions in China).

2) Rapid growth. One of the easiest ways to see how fast Alibaba’s growing is to look at Yahoo’s returns. In 2005, Yahoo invested $1 billion for a 40 percent stake in Alibaba. Now, they’re selling half that stake for $7.1 billion. Their full stake is worth some $14 billion, and that means they’ve made 14 times their money in seven short years.

3) The fat part of the curve. For most Westerners, buying and selling products online is second nature. That’s not the case in China. The country’s still in the fat part of the growth curve for e-commerce. Indeed, China’s online shopping industry is expected to grow by 42 percent this year (per Bloomberg). Contrast that with the U.S. where Q1 2012 e-commerce growth stood at 17 percent (per comScore). As China’s largest e-commerce provider, Alibaba stands to rake in a big part of that 42 percent growth.

Already, Alibaba’s pulling in substantial profits. The company generated $2.3 billion in the year ended Sept. 30 ($1 billion more than the previous year) and posted a profit of $268 million.

While we don’t know Alibaba’s IPO date yet, it is expected to come by the end of 2015 at the latest.

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Qunar IPO: 5 reasons to invest in China’s travel site

We don’t have a Qunar IPO date yet, but the company has announced plans to debut on U.S. stock exchanges next year. Here are five reasons to consider investing in Qunar.com:

1) Reach. Since Qunar.com’s launch in February of 2005, the Chinese travel site has become the 84th most popular Web site in China (per Alexa). In Q3 of 2011, it surprised traffic at competitor Ctrip.com (CTRP), and growth looks like it’s still in a powerful uptrend:

The company claims 51 million unique visitors a month. And that’s while online travel bookings are still in their nascent stages in China. Qunar expects more than half of all travel bookings will take place online within three years.

2) Thumbs up from Baidu. Baidu.com (BIDU) invested $306 million in Qunar in June. That makes China’s biggest search engine a majority shareholder in the travel site, and that’s good news. Working alongside Baidu is much better than competing with it. Currently, the companies cross-promote their services and they’re working on developing new offerings together. Getting a stamp-of-approval from Baidu practically guarantees the site will be the No. 1 travel site in China for years to come.

3) Monopoly anyone? Qunar has very little direct competition in China. Ctrip.com International, Ltd. (NASDAQ:CTRP) qualifies but only loosely. Ctrip acts more like an old-school travel agent processing a large number of offline bookings via call centers. Qunar makes 80 percent of its revenue off advertisements that pop up alongside results on its travel search engine (per the Wall Street Journal). As the company expands the ability for users to actually book travel online, revenues should climb.

4) Buying binge. Part of the reason Qunar plans to go public is to raise cash to help finance future acquisitions. That should help the company consolidate it’s position at the top of the market and immediately boost revenue for the company. While we haven’t seen any numbers, Qunar claims it’s already profitable. Growing it’s profitability without bloating its staff of 800 will be key moving forward.

5) Mobile ready. Qunar’s dumping lots of that investment capital it got from Baidu into mobile apps. Currently, the site’s got the No. 3 iPhone App in China, the No. 3 Nokia Symbian App, and the No. 15 Android app. The company has said it plans to expand its mobile offerings over the next year – particularly for the iPhone, iPad and Android. That should help as the mobile Internet market in China dwarfs that of the U.S. with more than 277 million mobile Internet users accessing the web behind the Great Firewall in 2009.

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3 reasons to invest in the 360Buy.com IPO (Jingdong Mall)

In what’s shaping up to be the largest U.S. Internet IPO since Google, Inc. (NASDAQ:GOOG), the Amazon of China, Jingdong Mall has announced plans to go public. Jingdong publishes 360Buy.com, the 120th most-visited Web site in the world. That’s a far cry from Amazon.com (NASDAQ:AMZN), which is ranked by stats-tracking company Alexa.com as the 15th most-visited Web site in the world. 360Buy’s got momentum on its side, though, and that makes me bullish on the stock. Here are three reasons you should consider investing in 360Buy.com when the company IPOs next year:

1) Growth potential. China’s internet population (at 485 million+) exceeds the entire population of the U.S., and that number is expected to triple to 1.5 billion by 2015. That will make the leading e-commerce site in Asia an international powerhouse. Amazon.com currently gets 6.8 times as much traffic as 360Buy.com. But I wouldn’t be surprised to see 360Buy.com overtake Amazon. Not only will the China’s internet population dwarf that of the United States, but the country’s still in the early stages of e-commerce adoption. Last year, online sales in China rose 77 percent (per FT.com).

2) Not to be confused with Taobao.com. Taobao may get significantly more traffic than 360Buy.com, but it’s important to note that they have different business models. Taobao’s a consumer-to-consumer e-commerce site that’s more akin to eBay than Amazon. While eBay garnered more traffic than Amazon in the early years of the Web, that trend has since reversed itself. Expect the same pattern to unfold in China as consumers turn to the Web not just for hard-to-find items and collectibles but for everything from jackets to diapers and laptops (all of which 360Buy.com offers).

JingDong is, indisputably, the largest business-to-consumer e-commerce site. And it’s purest competition comes in the form of E-Commerce China Dangdang, Inc. (NYSE:DANG). DangDang, which IPO’d to much fanfare in December, has since lost nearly 75 percent of its share price amid a rash of accounting scandals at several Chinese firms.

3) Revenue giant. Revenue at 360Buy.com is expected to hit $4.4 billion in 2011 (per RenaissanceCapital). That’s not much when compared with Amazon’s $40 billion, but it blows away DangDang.com, which will likely do somewhere in the neighborhood of $400 million.

Already, 360Buy.com processes some 300,000 orders per day from 25 million registered users. If the site can maintain its handhold at the top of China’s retail market, it should reward investors nicely in the years to come.

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How to invest in internet stock IPOs

One of the easiest ways to identify hot stock sectors is by following the release of new ETFs and ETNs. Last week, the Internet stock IPO market got its first two ETNs. The ETRACS Internet IPO ETN (NYSE:EIPO) tracks a UBS index of 20 tech-related stocks that have debuted on the NASDAQ or NYSE within the past three years. That includes headliners like professional social networking company Linkedin Corporation (NYSE:LNKD) and Russian search giant Yandex (NASDAQ:YNDX).

A sister ETN – the Monthly 2X Leveraged ETRACS Internet IPO ETN (NYSE:EIPL) – ratchets up the stakes even more by seeking to return twice the performance of UBS’ new tech index.

The funds give investors exposure to new tech stocks without forcing them to put all their eggs in a single company. That could prove appealing as many of the hottest tech IPOs have come from companies based outside of the U.S. Unstable political environments and intense competition in China and Russia, for instance, makes sinking cash into a single company risky.

three-reasons-to-invest-in-eipl-or-eipo

Here’s a look at the Top 10 stocks in the UBS Internet IPO Index. The index, which the new tech IPO ETNs will attempt to track, reads like a who’s who of the hottest tech IPOs over the past three years:

No. Company Ticker Weighting
1) LinkedIn Corp. LNKD 10%
2) HomeAway Inc. AWAY 10%
3) Yandex YNDX 10%
4) Rackspace Hosting RAX 10%
5) Pandora Media P 9.57%
6) RenRen RENN 9.2%
7) OpenTable OPEN 6.48%
8) Ancestry.com ACOM 5.97%
9) SouFun Holdings SFUN 3.44%
10) Demand Media DMD 3.39%
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