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Why Tesla (TSLA) is a Sell

Tickers in this article: TSLA

NEW YORK (TheStreet) -- Tesla  is climbing back from Monday's losses, up 1.9% to $123.89 by early afternoon. Shares of the automaker have taken a beaten recently after the company's once-spotless reputation came under fire.

A Bad Month For Tesla

Since Oct. 21, the electric vehicle (EV) maker has lost almost a third of its value, following three reported fires in less than six weeks. Investigators at the National Highway Transportation Safety Administration (NHTSA) have announced they will launch a formal investigation into the safety of Tesla's Model S.

CEO Elon Musk has been vocal in his disapproval of how the media has misrepresented the Model S' fire risk. Speaking to CNBC last week, Musk said, "If you read the headlines, it sounds like Tesla's have a greater propensity to catch fire than other cars. In actuality, nothing could be further from the truth."

To ease concerns, however, Musk detailed the new safety steps on the company blog, including updated suspension and an amended warranty to cover fire damage.

Also affecting share prices over the month, Tesla noted it has too little supply to match demand, sparking concerns the company cannot fulfill its growth potential. For the fourth-quarter, the company expects to deliver fewer than 6,000 Model S units. 

Tesla's Technicals

Though Tesla has seen a tremendous 273.1% run-up through 2013, many investors remain cautious over whether shares are overvalued.

As TheStreet technical expert and Trifecta Stocks portfolio manager Bob Lang explains:

"The chart shows a very oversold condition at this point but much of the recent price action has been accompanied by high volume selling, or institutional distribution. We often find when the big money is fleeing a stock the rest of the crowd is left to try and pick up the pieces. However, that is generally a tough challenge due to the fact so much supply is available. I would stay away from the name here."

The Case Against Tesla

TheStreet Ratings team reiterates Tesla Motors Inc as a "Sell" with a ratings score of D. The team has this to say about their recommendation:

"We rate Tesla Motors Inc (TSLA) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for Tesla Motors Inc is currently lower than what is desirable, coming in at 30.44%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, TSLA's net profit margin of -8.92% significantly underperformed when compared to the industry average.
  • Compared to other companies in the Automobiles industry and the overall market, Tesla Motors Inc's return on equity significantly trails that of both the industry average and the S&P 500.
  • Tesla Motors Inc reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TESLA MOTORS INC reported poor results of -$3.70 a share vs. -$2.52 a share in the prior year. This year, the market expects an improvement in earnings (57 cents vs. -$3.70).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Automobiles industry. The net income increased by 65.3% when compared to the same quarter one year prior, rising from -$110.81 million to -$38.50 million.
  • This stock has increased by 338.49% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the future course of this stock, we feel that the risks involved in investing in TSLA do not compensate for any future upside potential, despite the fact that it has seen nice gains over the past 12 months.