By Jordan Schneir
When Tesla (NASDAQ:TSLA) introduced its first vehicle to the world, investors clamored for what they saw as a truly innovative product. The world of electric vehicles no longer sat with small, compact cars that would only get a few miles before needing to be recharged. Tesla offered a luxury car that people wanted to own that additionally looked amazing.
Elon Musk leveraged his unusual personality and entrepreneurial spirit to receive free press and hype. But, he stunned the investment community when he actually began to turn a profit at Tesla. The reality of a sustainable energy vehicle seemed in sight. Yet, as the years rolled on, Musk’s hype seemed to slowly fade and reality set in. As the company grew they struggled to maintain production. Further, their offerings to high end clientele limited their marketable audience.
Today the company burns cash and struggles to maintain its company’s pace. Tesla issued a massive debt offering in an effort to shore up its balance sheet and maintain cash reserves. Even the deep pockets of Musk himself will only reach so far. The question now remains, what will the stock do?
Cash Flow Challenges
Bloomberg wrote a story back in April of 2018 where the headline would show how much cash Tesla had burned since you started reading the article. As they succinctly pointed out, the company’s free cash flow has been negative for six consecutive quarters, and topped $1B in their last quarterly report. As the company worked to ramp production, their headcount began to bloat. Subsequently, the company announced a 9% layoff of its staff in early June.
Over the past 5 quarters Tesla has failed to turn a profit, and even deepened their own troubles. Their Net Income has dropped precipitously quarter after quarter. That’s not to mention the reserves of cash on their balance sheet dropping in tandem. With $2.79B in cash sitting on their books in the latest quarterly filing, it’s entirely possible the company could eat up all their reserves within the next year or two.
Any company lives and dies by the amount of money they have to work with. Companies like Sears can be perpetually bailed out by their owners. Yet, the rate at which Tesla continues to burn cash will test the limits of Musk’s own pocketbooks. What’s worth calculating in an analysis is the amount of cash the company has on hand, the change in cash quarter to quarter, as well as a moving average of that change over time. These will be important to predicting how long Tesla can survive without either issuing additional shares, debt, or simply folding.
When the company reports their quarterly earnings look for any indications that the cash burn rate has increased or slowed. These are impacted directly by operations and capital expenditures. P&L statements aren’t as relevant as they include non-cash items that aren’t worth considering.
While the financials don’t paint a positive picture, the operational setbacks provide a more immediate challenge for the company. Multiple news outlets reported that Tesla finally hit its goal of 5,000 Model 3 cars in late June, a goal originally set for the end of 2017. Their production facility has been plagued by a myriad of issues, to the point where headlines were made by Musk when he brought onboard two Canadian interns to help solve some of the problems.
The problem hasn’t necessarily been the lack of production so much as the under-delivering of promises. When Musk held a fanfare event in July of 2017, he laid out audacious goals that never materialized. His once highflying persona couldn’t carry the company through the reality that it was failing to live up to its promises. Concerns have been raised of late that customers have begun to cancel orders due, in part to these production challenges. Pictures of stockpiles of Tesla cars sitting in lots have begun to creep up around the internet, showing customers cancelling orders due to excessive wait times.
For the better part of 15 years the company stood alone as the ones to create the vehicle of the future. Yet, the ever-changing landscape of consumer demand has pushed automotive companies around the world to rethink their business models.
While Tesla cars still dominate the news for electric vehicles, hybrid cars still hold some of the top sales spots across the globe. Since the introduction of the first products such as the Toyota Prius, most manufacturers provide hybrid models to their popular cars. While it’s not a fully electric vehicle, the range of options hits a wider base of customers, and more importantly, is readily produced and sold. Further, competitors such as GM already provide reasonably priced electric vehicles like the Chevy Volt that are widely available and reasonably priced.
While Tesla made some of the biggest waves in self-driving vehicles, companies from Ford to GM have taken their own steps towards being the first to market. True, Tesla has taken the brunt of criticism in this arena, with stories highlighting deaths and severe crashes with their driver assist technology. Nonetheless, the competitors to Tesla, many with deeper pockets, are quickly catching up. Little known company Waymo self-driving car recently made headlines as they logged their first 1 million miles in a month on public roads. How far ahead any of the competitors are day to day remains a mystery. Yet, the first to market in self-driving cars will retain a sizable advantage.
Net net, automotive companies are spending more and more money not just in self-driving vehicles, but into electric vehicles as well. Additionally, while little talked about, many invest in solid state battery technology, which much like autonomous driving vehicles, would be a game changer. While Tesla updates investors on their advancements, keep an eye on reports and headlines from top competitors in their development of electric vehicles, autonomous driving, and solid state battery technologies.
Lack of Focus
One of the largest concerns for investors is the lack of focus on the core business from its founder, Elon Musk. Musk consolidated power among his companies by acquiring Solar City under the Tesla umbrella. Yet, Solar City as a company didn’t fair well prior to the purchase, consistently burning cash. While the company has been able to slow the burn of cash at Solar City, their problems only exacerbate the current worries that afflict Tesla.
Keep in mind, these ventures only retain a portion of Elon Musk’s time. Space X, Elon Musk’s space race endeavor, stepped into a void created by NASA when the Obama administration decimated their funding. Musk’s Hyperloop company hopes to change transportation completely by developing an effectively sealed tube that is capable of transporting across land at incredible speeds. This goes hand in hand with his Boring company that works on tunnel digging. Investors are rightly concerned that, while Tesla may be the flagship brand, it’s not getting the full attention it deserves.
Stock Chart Analysis
Looking over the Tesla chart itself, the one year stock prices show a lot of volatility. With highs over $375, and lows near $250, the company’s price is anything but stable. Interestingly, for all the price movement the one year return on the company sits at -4.51%. A longer-term picture of the company shows a sizable gain of 150%+ over a five year period. For as much negativity that is seen in the news, investors still haven’t run for the exits.
More recent price action suggests that many are taking a wait and see approach with the company. While the negative news has pushed down share prices, they still sit relatively close to their all-time highs. The reaction to the company’s quarterly earnings reports in the coming months will be a key barometer for where the stock price will go. Additionally, it’s worth noting that because of the precarious cash and debt position the company sits in, any significant downswing in the share prices could create a negative feedback loop on the stock and the debt.
Knowing the key factors to drive the company’s share price, start by looking at the way other high flying stocks have recently traded off their earnings. Netflix reported atrocious subscriber numbers, and yet the stock reversed solidly intraday. The NASDAQ 100 sits at record highs, even when other areas of the market fail to catch a bid. These lead to the conclusion that investors are still putting money to work in the popular FANG stocks.
As such, Tesla will likely see one of two scenarios occur. The first is they have some amount of bad news that causes the stock to gap lower in the morning. If the overall market hasn’t shown and serious signs of slowing down, Tesla will likely regain its legs throughout the day. On the flip side the company could beat expectations, which would likely send share prices soaring.
Because of the volatility in the stock, if you want to play earnings, options are probably the best bet at the moment. Call options provide a good upside return with a known risk. Purchasing partial position prior to earnings would allow you to take advantage of the possible beat in earnings, as well as leaving you the option to purchase more should the stock gap lower on the announcement.
For longer term investors a gap down in share prices would offer a way to average into an investment over time. Because of the large volatility the stock sees over a year, there isn’t a rush to jump in ahead of earnings. Rather, if you believe in the company and its story, use pullbacks in the share price to increase your position. However, keep an eye on the overall technology sector as a fallout there could bring Tesla share prices down rapidly.
Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article. The author is not receiving compensation for this article. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.