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.
And look at this nonsense - ' Bank of America points out that the reduced price has been achieved by reducing the battery size and range' Bank of America hasn't pointed this out. Telsa pointed this out! That's literally been the plan the entire time! The other versions were literally called 'Long-Range' to distinguish between the shorter 'Standard-Range' they also said they would come out with once they could make a profit on it. And now CNBC is trying to make it sound like a bad thing that a product they promised at this lower range has been made! Telsa didn't go, "Oh no, we're not selling cars, let's slip in a lower range model and hope no one notices'. They've been advertising this car at this range for years!
The US luxury ICE market has been destroyed, the $35k Model 3 will kill off the next lower tier of sedans. The crossover market collapse begins on 3/14 when the Model Y is revealed.
For the next two years Tesla will be selling Model 3's at an avg price of $43k or so. That's an avg margin of ~20% and will certainly rise from there as efficiencies are created. Battery costs and densities are making massive progress each year.
The best of today's legacy carmakers will survive, but only after a good 5-8 years of catching up and making no money.
At the same time, they need to build much of their own infrastructure to service and fuel the cars. Yet here we are with a mass produced profitable vehicle with sales expected to be 400k in 2019.
They&#039;ve made mistakes, Solar City seems to be a big one. And they&#039;ve been unable to meet the CEO&#039;s production ramp plan due to inefficient manufacturing. But the reality is what they have done is incredible, and they will find lots of capital available should they need it to complete the Chinese giga and to ramp the Model Y. At that point with production efficiencies improved, the case for the BEV will be over (it actually already is). These cars are going to sell cheaper than ICE vehicles because they are soon to be much cheaper to make. They have less parts, in particular complicated moving parts in the drivetrain and its other components. They are vehicles heavily reliant on high volume low cost technology.
My guess is Tesla won&#039;t need any capital, as they are becoming efficient enough to make profitable model 3 at 35k with a volume of over 6,000 per week. That will get them to the next step.
To remain highly competitive cutting fat will be a regular occurrence at Tesla, even as they grow employee headcount year to year. This has been the practice in SV since I&#039;ve worked here. Very common even at high growth companies. This is how companies remain nimble, easily remove wasteful business units and expand successful ones. Cutting the sales offices is a prime example. Risky in terms of how the car business has run in the past. Not risky in terms of how it will run in the future, when consumers shift to transportation as a service, rather than buy their own vehicle. This means vehicle sales as a whole will be declining and most sales will be for fleet sales. This is coming fast, as is completely tied to SDC&#039;s, Tesla knows it and is setting itself up to lead it. (while the other guys will be stuck figuring out how to get rid of dealership franchises that are protected by state laws.)
Will Tesla fail, I doubt it, everything my 40 years of investing tells me they have reached a point where success is almost guaranteed. The hardest stuff is behind them and they have a big enough lead that it&#039;ll be 3 years or more before the competition can catch if then.
Certainly Tesla is driving the whole industry to the new frontier of BEV&#039;s, and that in the end is what&#039;s most important.
A Trump tariff tax on imported German cars might save them by increasing the cost of the German electrics. A big increase in the price of gasoline would save them too.
I suspect the stock price will go down for quite a while. The car business is tough. A recession can severely impact vehicle sales. And the US is long overdue for a recession.