Monday, May 13, 2019

Tesla, What Is The Company Worth? Nobody Knows!

Tesla Is Encountering Obstacles In Its Path
Tesla's stock price continues to hang on but continuing signs of the company's demise continue to leak out. With over 100 different electric cars expected to hit the market by 2025 it is difficult for a realist to envision Tesla being able to remain viable. The rapid approach of real competition into the rather small Electric vehicle market is occurring at a time of falling auto sales. This could translate into tight profit margins and a situation similar to what we witnessed in 2008 when the automobile industry fell off a cliff resulting in a government bailout of GM and Chrysler.  Simply put, the mismanaged, money-losing, cash-burning company led by Elon Musk may be only months away from a major transition into something far different from the Tesla we see today. Most likely such a transformation will leave behind a slew of broken promises and a great deal of financial carnage.

Ironically up until now, Musk's greatest strength may have been that so many investors doubt his ability to perform. This means that a slew of impatient clowns have shorted Tesla stock in search of quick profits. Like Musk, these bearish investors have continually shot themselves in the foot at every opportunity. They do this by constantly finding reasons to rush to the exits in short covering panics that invariably brings the share price back up. We tend to forget but Tesla's fortunes dramatically changed years ago following the report it made its first quarterly profit, it's market value soared to more than $10 billion largely because people that had short positions in the stock were caught in a short squeeze and forced to buy back their stock. At the time Musk said, “I thought it would be quite difficult to raise the capital for Tesla.” he went on to state his realization the electric-car maker could retire its U.S. loan nine years early didn’t arise until that unexpected surge.

Since that time Tesla's fortunes have moved in lockstep with a surging stock market. I have written several articles about Tesla and Musk over the years. In an overview in early 2017, I wrote about how as I continued my research for the update my eyes literally began to glaze over at the magnitude of the subsidies that Musk had been granted. Government support is a theme of all his companies, and without it, none of them would exist. Also, there was the issue of "corporate incest" and Tesla's acquisition of ailing SolarCity in an all-stock $2.6 billion merger. At the time Musk owned 22% of SolarCity which was founded by his cousins. The merger was promoted on the idea that Tesla's mission since its inception was part of Elon Musk's overall "Secret Tesla Motors Master Plan" to expedite the world's transition to sustainable energy and away from a fossil fuel economy.

As for the value of Tesla, and where the stock price is going, it seems predictions are all over the board. Ark Invest chief Catherine Wood is holding firm on her thesis on Tesla. She believes could run to $4,000 a share or higher. Others of us continue to agree with David Stockman. He wrote in May of 2015, In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder. While Stockman's timing may have been off many investors continue to echo his sentiments.

Circling back to the issue driving this article which is the fact that Tesla is about to become overwhelmed by this new wave of  "Tesla crushers" that are only months away from hitting showrooms. A recent Bloomberg article pointed out how the initial response to Volkswagen's new ID.3 electric hatchback designed to bring EVs to the mass market has been so overwhelming that it "overloaded" Volkswagen's IT systems. Over 10,000 people shelled out around $1120 to be placed in line for the Volkswagen electric hatchback, this far exceeded. expectations. For Volkswagen the ID.3 marks the beginning of a rollout of more than 20 battery powered models over the coming years. Their goal is to sell more than 1 million electric cars annually by 2025.

Volkswagen Is Taking Orders On The ID.3
The first deliveries of the ID.3 are planned for mid-2020 with assembly starting later this year. Volkswagen has a target of 100,000 sales per year of the new model. The first "limited-edition" run of the ID.3 is priced at less than €40,000 and have a range of 260 miles. A "basic version" will have a range of 180 miles while a "top-of-the-line" model will be able to travel 330 miles. Volkswagen has made it clear that unlike Tesla, profitability is important and that they plan to and must make money in the EV market. it also moves forward thinking the time is arriving where EVs are about to break through to the mass market which has yet to occur.

Not only has the overall market continued to move higher with each wave of new central bank stimulus but with low interest rates and easy money, Tesla has continued to find investors willing to buy its bonds allowing it to postpone its day of reckoning. Like many people that are predisposed to discount, and have actually grown a massive aversion to "media hype" you should color me skeptical about Tesla's ability to survive the coming onslaught of competition. The city where I live, like many others across the world, have a long list of bold men herald and declared to be "gods gift to industry"  but then flew too close to the sun only to crash and burn. This is what I envision to be the fate of Mr. Musk when all is said and done.

Footnote; Another electric car company that was not as lucky as Tesla and saw its fortunes fall was Fisker Automotive. For those interested in politics please note the connection to Vice President Joe Biden to what might be called the "Fisker folly." The link to that article can be found below.

1 comment:

  1. Many market watchers see Tesla the "Poster Boy" of absurdity and proof of how liquidity has blown a massive bubble in equity prices. For a more recent look at this phenomenon see the article below.