Tesla (TSLA) is a stock, indeed a company, that seems to produce extremes. Its fans, the so-called Tesleratis, will hear no criticism. They are true believers who are convinced that the company is the future and is on a crusade to save the world from the evils of fossil fuels. Its detractors tend to be a little more pragmatic, pointing to its record in the most basic function of a corporation, making money, as a reason for their dislike, but they too can be fanatical in their views.|
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As I have pointed out in the past, I fall into neither camp. To me, TSLA has simply been a great trading stock. The passion that surrounds it has led to usable volatility within a defined range. That is an ideal trading instrument and opposing each big move on signs of a reversal has been profitable for some time. Yesterday’s announcement that they expect to lose money this quarter that accompanied the launch of the new, cheaper Model 3, however, may be a game changer.
Or, more accurately, the reaction to that announcement may be. Wall Street seems to be losing patience with Elon Musk’s company.
CNBC’s survey of the immediate reactions of analysts who cover the company found nothing but negative takes on the news, and on the cut-price Model 3 itself. The criticisms are valid. As Bernstein say in their reaction, the margin on the new car seems to be around zero and Bank of America points out that the reduced price has been achieved by reducing the battery size and range, rather than by cost savings.
For some companies, particularly relatively young, disruptive ones, sacrificing margins for market share makes sense. The problems here, however, are two-fold. The first is that Tesla is already heavily indebted with a debt/equity ratio of just over 219. Further losses could well mean raising more capital, possibly by means of an equity sale that would dilute existing holdings.
The second is less tangible but may have a greater effect over time. The analysts, and presumably many investors, feel betrayed. In January, when Elon Musk announced staff cutbacks, it seemed as if the company was finally accepting that profit mattered. Indeed, I wrote as much at the time. The decision to push ahead early with a new model at an at best breakeven price, though, suggests otherwise.
The Tesleratis will no doubt argue that the mission of bringing EVs to the masses is what counts here, but their passion may not be enough this time. There is an army of small investors who might feel that way, but the fact is that over 60% of Tesla shares are held by institutions. The “mission” doesn’t matter to them, money does, and if they listen to the analysts that they pay big bucks to for their opinions, there could be a rush to exit the stock that sees TSLA challenge, or even break, the lower limit of its trading range.
The other, more rational argument for still believing is that none of this will matter in the long term. If this move were clearly part of a long-term strategy, that might still make sense, but that doesn’t seem to be the case. Tesla keeps oscillating between hard-nosed business decisions and pursuit of the dream and that lack of consistency is troubling.
For the sake of the planet, and because of some of the bold entrepreneurial moves made by Musk to this point, I am sure many want to retain their belief in the company. But with profitability further delayed and yet more cuts to sales and marketing staff that were also announced yesterday, that is becoming harder to do, even for the true believer. Fund managers aren’t usually true believers in anything except profits and, given the likelihood that they will jump ship in the coming weeks, getting out of TSLA now, at least for a while, looks like the only logical thing to do.