Sunday, February 7, 2016

Tesla So Much Attention, So Few Cars!

When Tesla's stock drops in value the company will have to give up far more to procure the funds to feed its massive cash-burn. To clarify, Tesla is in a capital-intensive business and has a poor record as to spending efficiently. It is amazing that the company garners so much attention while producing so few cars. The fact that Tesla has been able to borrow cheaply and the aura surrounding its charismatic CEO Elon Musk drives this company. Analysts estimate Tesla, which has consistently lost money, will eat through $11 billion in capital spending over the next five years. While it is easy for investors to get caught up in the hype of how electric cars will be the demise of the gasoline engine such claims have been slow to materialize. I recently stumbled across a copy of Time magazine from the 1990s where the front cover proclaimed the time of the electric car had arrived. The auto industry is a highly competitive and crowded sector where any misstep can be the disastrous for a company, especially one in Tesla's position.

Only About 1 In 5,000 Cars Is A Tesla!
In January 2016, Ford Motor sold 173,723 vehicles. This is far more than the 50,580 Tesla is said to have delivered in all of 2015. Ford with its current market cap of 45 billion dollars is a solid cash machine banging out solid profits and big dividends. This makes it hard to understand how Tesla that is spending big and burning cash has a market cap of over 21 billion dollars or around 42% of its much greater competitor. For those who really care the obvious elephant in the room is that Tesla stock is trading at incredibly high multiples, which should be contributed to the historically low interest rates and the luck of being in the "QE moment" rather then its financial success. Just how small is Tesla's footprint? The math shows only about 1 in 325 cars sold in America last year was a Tesla and of the over 250 million registered passenger vehicles in America only 1 in 5,000 sports its name. It is little wonder I have not seen a Tesla in the wild. While these cars roam the streets of Las Vegas as a "hot little rental" turning heads and continuing to "wow" the masses, here in the more conservative Midwest they remain as rare as hens teeth.

The stock has been under pressure lately as articles have circulated on as to how Pacific Crest Securities analyst Brad Erikson has become more cautious on the electric-car maker's stock. He recently increased his loss-per-share estimate for 2015 to $1.10 from $1.09, but more important he has slashed his 2016 earnings-per-share estimate to 27 cents from 76 cents. "Consistent with our October checks, our latest checks with U.S. sales centers indicate that Model X orders are still lagging expectations," Erikson wrote in a note to clients. "While getting the X to showrooms would help, we don't expect that to happen until later this spring due to production challenges" he said. Erikson doesn't believe the Model S promotional offer of 20% off the old lease cost has driven a significant sales increase. "We can't overstate the importance of the March 29 Model 3 unveiling, but we remain suspicious of underlying demand" he said then went on to reiterated his sector weight rating saying it was best to continue avoiding the stock.

Even Morgan Stanley analysts that have long been positive on Tesla admit they expect it to burn through nearly $1 billion in the next 12 months, but see its cash burn as outweighed by its “bigger mission.” It appears they feel Tesla may soon challenge Uber by "selling miles" and not just cars. Analysts at Morgan Stanley, led by Adam Jonas, seem to believe that Tesla is likely to begin to clearly communicate potential plans for a mobility service (selling miles, not cars) to investors. Assuming Tesla establishes itself as a leader in autonomous cars, Jonas sees a business case for selling driver-less cars to ride-sharing companies or even cut out the middleman and offer on-demand electric mobility services directly from the company’s own platform. Adam Jonas maintains an Overweight rating for the company, but reduced the price target from $450 to $333. It should be noted that even though Tesla recently rolled out a global, over-the-air software upgrade that added or upgraded semi-autonomous driving features to its cars Musk has said the company is three years away from a fully autonomous car.

Not everyone is so enthusiastic over Tesla's potential, in October 2015 Barclays' Brian Johnson detailed why the electric-car company's brand new Model X SUV may fail to meet the company's expectations for production and put pressure on margins. This caused Johnson and his team to lower their price target 5% to $180, and cut their rating to "Underweight" from "Equal-Weight." Last I heard Barclays analysts, among the biggest Wall Street skeptics toward the company, kept intact their sell rating on the stock and a price target of $180, as I write this Friday's close at $162  is well below that number.  Johnson indicates that estimates for Tesla's margins are likely overestimated, and the company is about to get a "reality check". He feels the Model X is will provide engineering challenges and manufacturing challenges causing the production ramp to slow, while difficultly in concurrent S/X production will also push margins below current consensus.

Winged Doors=Massive Headache
Rising cost and concern bolstered this argument as the Model X launch had been pushed back with CEO Elon Musk admitting the Model X's advanced technology has caused major delays. Musk claims the Model X was "the most difficult car in the world to build." The crossover has intuitive automatic futuristic "falcon wing" doors with built-in sensors to keep them from dinging nearby cars. A panoramic windshield that features what the company claims to be the largest single piece of glass ever installed on a car. And an air-filtration system with a "bio-weapon defense mode" all this comes together to create an insanely complex car. With more engineering challenges always waiting in the wings to will slow down manufacturing doubts also exist as to whether Tesla will release the forthcoming Model 3 on time in 2017. On top of all that Barclays also lowered their expectations for Tesla Energy. They see fierce competition in the power storage space, and they're not sold on the fact that Tesla's Power-wall battery is superior.

The attention to Tesla is not only because of its cars, Barclays views Tesla’s key strength is in its software prowess, such as its over-the-air technology updates and its driver-less features rather than producing and selling cars. This has lead the Barclays analysts to say, “We are concerned that the capital intensity of the core automotive business may further overshadow Tesla’s competitive edge in software.” They contend that if the company doesn’t become more efficient in making its planned mass-market car, the Model 3, it runs the risk of running out of money to invest in the software side of their business and the products that “truly differentiated” Tesla from all others in the field.  Pre-orders for the Model 3 are expected to begin in March, but production is about two years away. Tesla CEO Elon Musk has said he expects the car to cost $35,000, however even the Tesla enthusiast at Morgan Stanley say the cost is more likely to be between $55,000 and $60,000.

To some of us it is a real reach to think this small scale producer of electric-cars can suddenly blossom into a giant automotive force. Time is not the friend of Tesla as competitors ramp up in what will be a very competitive market if electric cars do indeed go main stream. Ironically, it is the bearish investors that doubted Tesla would hold together that have pushed up the stock as they were forced to run for cover. This has only added to the image that Musk lives a charmed life. Remember Tesla received a huge government low interest loan to kick start its existence and continues to feed at the trough of government tax incentives. The glamorous automotive sector is an area where many like icons such as DeLorean have failed. I have become predisposed to discount and grown massively adverse to "media hype", this is one reason I'm very skeptical as to how Tesla will fare going forward. As I wrote at the beginning of this piece, when Tesla's stock drops in value the company will have to give up far more to procure the funds needed to feed its massive cash-burn. This could create a massive negative feedback loop.

Footnote; As always your comments are encouraged and I invite you to explore the archives for other stories that may be of interest to you. In the way of full making full disclosure I'm short "five" shares of this stock "for fun, and so at some point in time I will have the right to say I played!" I consider this a very minor token investment, but my convictions compelled me to make a statement of protest to such market insanity.

Footnote #2; Since writing this piece I have posted an an article about fuel cells and how hydrogen powered cars may trump Tesla's vision of battery propelled vehicles. More recently I also wrote an overview of Musk and the company. The links are below.


  1. Interestingly enough, I've seen a few Telsa model 80 cars here in Pittsburgh, one in front of me heading home, and a few of at the Tesla Superchargers, located nearby at a Residence Inn in Cranberry Twp, PA. Cranberry Twp, and several areas around it have some pretty well off people, so that probably explains it.

    I find the Tesla car interesting. Certainly the software features, the semi-driverless cars, and the good range and free power charging stations near me are a bonus. The bio-weapon air filtration mode interests me from a preparedness standpoint.

    But the current low gas prices certainly put a crimp in your energy savings. And even with the Tesla Superchargers, it takes a little over an hour for full charge. Sure, you could charge it for 15 minutes, and get enough to go home. But for long trips, it becomes vitally important to plan your trip. Also, I would imagine in very hot, or very cold weather, the heating/cooling needs will seriously affect your batter life.

    1. I agree that hot or especially cold weather is not their friend. I understand the bulk of them are being sold along the mid to southern coast.

    2. Exactly. I just read an article with said that the hot weather in Arizona is actually pretty bad for the Tesla's. The battery pack has to expend energy to keeps itself cool, even when it's parked. So, your Tesla parked out in the sun (or even the shade) when it's 100F is losing a fair amount of charge in a few hours. So, you have to plug it in. Sounds monumentally inconvenient.

  2. I do not see any financial sense of a $100,000 plus car. That would buy a whole lot of gasoline.