Tesla: Avoid at all Cost or Time to Invest?
After a sharp decline in the price of Tesla’s stock, subscribers have asked and we’ve also wondered is Tesla a good long-term investment? The company has been caught in a cycle of bad news, which has negatively impacted the stock and caused investors, analyst, fans, and detractors to wonder about the future of Tesla. When we think of Tesla as a company there is a lot to be excited about, the electric vehicles, the solar roof, and Elon Musk as the captain guiding the ship. However, underneath the glamour of electric semi trucks and new roadsters, Tesla has its problems. It’s not a laundry list of problems, but we identified four issues that we consider to be major headwinds for Tesla.
So what are the issues plaguing Tesla? The four we’ve isolated are debt, delays, a changing political environment, and competition. These issues aren’t exclusive to Tesla, every business deals with these issues, but in Tesla’s case these have become very serious issues as we’ll explain.
First, The Debt.
From the perspective of revenue growth, Tesla is everything an investor would want. The company has grown from $2 billion in revenue in 2013 to $11.7 billion in revenue in 2017 (as seen in the chart above). Although, as revenue has grown so have the losses. Net losses in 2013 were $74 million and in 2017 the company reported a loss of $1.2 billion (as seen in the chart above).
When companies are making money - revenue - but unable to turn revenue into profits, they tap the capital markets for more money. And the capital markets have been kind to Tesla. In 2013 the company’s total debt was $607 million dollars, in 2017 the company reported $10.3 billion dollars in debt, and it has recently raised another $546 million by selling auto lease-backed bonds. With the recent issues at Tesla, some analyst have speculated that Tesla will find it harder to borrow money in the future. If this is the case, it really puts the pressure on Tesla to become a profitable company sooner than later. Elon Musk recently stated the company will not require an equity or debt raise this year, which is a good thing, because the company’s credit rating was downgraded from B2 to B3. However some analyst have inferred that in order for Tesla to start production of its Model Y – yet to be officially announced – and its semi-truck it will need to raise capital. Even without a capital raise, the rising 3-month LIBOR rate could hurt Tesla's financials moving forward. The increasing 3-month LIBOR rate will have an impact on current Tesla debt with adjustable rates.
Second, The Delays
Tesla confirmed rumors from insiders that it did stop production on the Model 3 for about a week in February. This was just another setback in a series of setbacks for Tesla. Tesla’s initial production goal was 20,000 vehicles a months by the end of 2017, but the company was unable to meet this goal and now has a revised goal of 10,000 Model 3s per month by June 2018. The company states that the shutdown in February was a planned shutdown to improve automation and systematically address a bottleneck in orders to increase production rates, and it may have worked. The company was able to close the last week of the quarter out with 2,000 Model 3s produced. However, this isn’t the only delay Tesla has had to deal with, the company had delays at its Gigafactory, which Elon Musk described as “production hell.” As for the reason for the delays, former and current employees have come out that flawed parts are the cause for the delays in the Model 3 production. But delays aren’t anything new to Tesla, the Model X experienced delivery delays due to parts shortage, but the Model 3 was supposed to be different.
The reason why the recent delays have been seen as a big issue for Tesla, is because the Model 3 was supposed to be the car that Tesla used to show the world that they had worked out all of their kinks. If Tesla was able to meet their initial goal of 20,000 Model 3s per month, it would have shown the world that Tesla wasn’t a tech company playing with cars, but a real car company.
Third, The Changing Environment
One of the benefits of buying an EV was/is the tax rebate many states and countries handed out. But this seems to be coming to an end. In the United States, once Tesla sells 200,000 vehicles the tax credit drops from $7,500 to $3,750. Tesla has stated they plan to hit the 200,000 mark in 2018. What makes this an issue in the U.S. is that the rebate only applies to delivered vehicles. With delays plaguing the Model 3, the company could hit the 200,000 vehicles sold mark - with the Model X and Model S - before delivering Model 3s to buyers who were counting on the $7,500 rebate. In Canada’s updated EV incentive program, vehicles over $75,000 are no longer eligible for a tax rebate. Is this a major deal for Tesla, it could be. It would not be unreasonable for a consumer who planned to make a purchase with a $7,500 rebate to cancel the purchase if the $7,500 rebate no longer applied. Since Tesla won't hit the 200,000 vehicles delivered until later in the year, we'll have to wait and see what the reaction will be from those consumers who will no longer be eligible for the $7,500 rebate.
Fourth, The Competition
Tesla has revolutionized the EV and the auto industry. Not only does the company make EVs, they make good looking EVs. It was easy for Tesla to stand out in a field of few EVs, but things are changing. Almost every car company is getting into the EV market. GM has the Chevy Volt, Nissan has the Leaf. Toyota announced by 2025 all Toyota and Lexus Models will have an electric option. Ford announced plans to invest $11 billion to create 40 electric vehicles by 2022. Volvo announced it will go all electric come 2019, BMW has introduced its first all electric vehicle the i3. Mercedes plans to offer electric versions of all their car models by 2020. The bottom line is the field is going to get crowded. Tesla does have experience and know-how on their side since they’ve been doing the EV thing for quite some time, but an investor shouldn’t put to much stock into Tesla’s experience over it’s competitors. Companies like Ford or Mercedes can spend billions of dollars on R&D and incubate an idea or electric vehicle and still keep the lights on at the company with their current offering of cars. While companies like Ford and Mercedes are a few years away from releasing their EVs, when they do they could hit the ground running without the production delays, delivery delays and cash constraints that have plagued Tesla.
According to Statista 81 million cars were sold world wide in 2017. Tesla produced 100,000 vehicles in 2017, which is less than 1% of worldwide auto sales in 2017. The optimistic Tesla investors point out that if the company is able to secure 1% of auto sales in the near future, the stock at this price could be a steal, but this puts Tesla on another clock. This time the race is to the grab 1% of the market before their competitor’s EVs hit the market. Gaining that 1% will become even more difficult if Tesla cant get it’s production process streamlined by the time the new EV’s begin entering the market. Tesla has had a tough go of it when competing against time and delivery schedules. How will they fair when companies that have decades of experience manufacturing automobiles enter the market, and consumers have other options?
The Question Mark: Elon Musk
Elon Musk, the man driving the Tesla bus has been a visionary, a rock star, and the CEO. He has been able to accomplish things with Tesla that people thought were decades away. His rock star status was evident when he was able to sellout 20,000 flame throwers at $500 a piece. Who said to themselves that a $500 flamethrower is what they needed before Elon Musk debuted a $500 flame thrower? His ability to be a focused CEO however maybe why Tesla has had the issues that it has had.
There is no denying that Elon Musk is a brilliant individual, but even the smartest individuals can be stretched too far. Aside from Tesla, Elon Musk is overseeing Space X, Solar City, Hyperloop, OpenAI, and Neuralink. With a mind as brilliant as Elon Musks’, it's easy to wonder how much further along could Tesla be if the car company had his full attention. And within Tesla, could the recent delays have been avoided if all of the companies focus was on the production of the Model X, Model S and Model 3?
At the Model 3 unveil in November, Tesla showcased it’s Semi-truck and new roadster. This was another situation where many wondered if Tesla as a company would have been better focusing all of its attention on the production of the Model 3, before premiering their next model of cars. Recently Elon Musk has stated that he is back to sleeping at the factory. Hopefully he will be able to get the kinks worked out so that the company can hit it’s revised goal of 2,500 Model 3s produced a week.
Currently Tesla finds itself in a very bad news cycle, and there are so many issues at the company that the stories just keep coming. Will the company ever emerge out of this bad news cycle, and if so where will the stock price be when it does? The decision to invest in Tesla or to avoid it all together is a matter of an investor’s perspective. When compared to Ford and GM, Tesla is an overvalued car company, however when compared to other Silicon Valley Tech startups in the past and present it’s doing what it should be doing, growing revenue rapidly.
As it stands we believe Tesla is a risky investment. The debt, the delays, the changing environment, the competition, the lack of focus, it’s all enough to make us want to put our money elsewhere; but at the current price with the company’s current set of issues, this may be the time for an investment, the riskier the investment the better the reward. If you are a true believer in the Elon Musk dream for Tesla this may be an opportune time for an investment with the stock close to or below the $300 level. For the more conservative, preservation of capital over everything investor this may be an investment to pass on.
Do you think Tesla is a good investment? If so let us know in the comments below. To stay up to date with The Seville Report's research and articles, check out sevillereport.com and leave us your email.