Will Tesla Still Be Around In 5 Years?

Brief Insights

While Tesla has achieved some notable successes, its inability to meet its own production goals and targets is troubling.    

Although Tesla’s electric cars aimed at the consumer market are stylish and innovative, its technology is neither ground-breaking nor disruptive. So how can it manage to stay alive as an unprofitable niche player in the highly competitive auto industry?

  

In February Elon Musk launched a Tesla electric sports car into space on the powerful new Falcon Heavy rocket, and Tesla also reported its fourth quarter earnings, which narrowly beat analyst estimates. The company’s revenue rose to $3.288 billion, from $2.284 billion a year ago. Both of these events demonstrate Tesla's potential and sheer audacity. Yet, these headline grabbing events don’t change the fact that the company is hemorrhaging red ink, losing $1.9 billion for full year 2017, and those loses will increase even further in 2018. Additionally, during their earnings conference call, company officials tried to tamp down expectations for 2018, citing battery supply constraints and production delays at their new state-of-the-art Gigafactory. The Tesla Gigafactory, still partially under construction, is located near the unincorporated community of Clark, Nevada, in northern Storey County, about 17 miles east of Reno. Construction on the facility is expected to be completed by 2020.

According to David Trainer the CEO of New Constructs, an equity research firm, Tesla has been plagued by production problems from the very beginning, from its first car, the Roadster to the current Model 3. The Roadster actually used an AC motor originally designed in 1882 by Nikola Tesla himself. Additionally, Trainer wrote in a recent article that the Model 3 production problems also led to the delay of the debut of Tesla’s first commercial vehicle, the new electric semi-truck. Further, Trainer points out that while Tesla promises the moon and even Mars, the company continues to struggle with basic manufacturing and production. Tesla’s main vehicle manufacturing facility is in Fremont, California. Moreover, Tesla’s troublesome production delays aren’t occurring in a vacuum. There is increasing competition in the electric vehicles (EV) arena. The Chevy Bolt outsold all Tesla models combined last October, and Chevy delivered over 23,000 Bolts in 2017. Tesla clearly needs to fix its production issues, or some on its long waiting list of EV customers may abandon it for more easily accessible options.  Tesla quickly racked up 373,000 pre-orders for the Model 3, charging $1,000 just to get on the waiting list. 

Nevertheless, Tesla, based in Palo Alto, California, does have strong enthusiasts, and also is now listed, as of 2017, on Statista's Top 10 Most Valuable Brands within the automotive sector worldwide.  Tesla made it into the ranking for the first time last year, and the Tesla brand alone is valued at $5.88 billion. By comparison, Toyota was ranked as the world's most valuable car brand in 2017, with a brand value of $23.5 billion. Tesla also produced its 300,000th vehicle in February 2018. Plus Tesla's new heavy-duty electric truck is truly a potential game changer.  The electric trucks made their "first production cargo trip," transporting battery packs from Tesla's Gigafactory in Nevada to the company's car-assembly factory in Fremont on Wednesday, March 7th.  Tesla is currently considered to be a niche, luxury car maker, and not a commercial truck producer. Nevertheless, when Tesla first unveiled its sleek electric semi-truck in November, and announced that they were entering the $719 billion freight shipping industry, the news immediately generated enthusiasm for the electric truck, which will have a range of 500 miles per charge, and can accelerate from 0-60 mph in five seconds. Although full production isn't expected to begin until 2019, companies are already placing orders for the electric big rig. Walmart, Meijer, a Michigan-based supermarket chain, J.B. Hunt Transport Services, Pepsi, and Anheuser-Busch have all placed orders for the Tesla Semi, putting down a $5,000 deposit for each truck, according to CNN Money. The electric truck will most likely be used for short hauls, but the Tesla Semi is likely to make some waves in the industry, CNN Money's auto guru Peter Valdes-Dapena pointed out. Moreover, some extreme enthusiasts say Tesla is the next Apple Inc. However, Apple is not plagued by the constant production headaches that Tesla can't seem to overcome. One of Tesla's key production concerns is limited battery availability. Panasonic currently produces the batteries for Tesla automobiles. But the battery currently being produced is an older technology and there are likely no other automobile volume buyers for this technology except Tesla. And for that reason Panasonic likely does not want to expand production capacity of that battery, especially since Tesla plans to switch to a new battery sometime in the second half of 2018, according to a Seeking Alpha article. Moreover, these problematic capacity issues and production delays have caused Tesla's operating expenses to skyrocket.  

And speaking of rising costs, Tesla plans to award CEO Elon Musk an estimated $2.6 billion in long-term compensation. Since the company has yet to turn a profit, this massive increase in compensation has raised some eyebrows, and generated negative feedback from some investors. If the company was currently profitable, this wouldn’t be a cause of concern. Tesla also stated that its ultimate goal was to reach a market capitalization value of $650 billion, the company’s current market cap is $56.6 billion. Talk about swinging for the fences, this is an extremely ambitious goal. To put things into perspective, Toyota’s market cap is currently $185.7 billion, and they earn $15 per share. However, Tesla currently loses -$11.83 per share, and failing to meet production targets with its new Model 3 has sharply increased its spending. And indeed Tesla's freewheeling spending is somewhat alarming to some of its investors. Tesla’s aggressive spending has been previously challenged by Tesla stockholders. When Tesla agreed to acquire SolarCity Corp, the largest installer of rooftop solar systems in the US, for $2.6 billion in August 2016, stockholders filed a lawsuit. SolarCity was co-founded by two of Musk's cousins, and the plaintiffs alleged that the Tesla board of directors, of which Musk is the chairman, breached their fiduciary duties in approving the acquisition. Tesla’s current rate of spending is so aggressive that the company is predicted to run out of cash by Monday August 6, 2018, according to motor1.com. However, with large looming debt repayments due and Capex commitments, Tesla will most likely revisit the capital markets sometime in the first Half of 2018, to replenish its cash reserves through a bond offering.

Tesla clearly believes that aggressive spending is a necessary means to reach their ultimate goal.

“Yes. It's also like for any given complex manufactured item, in order to go past the total capacity, you really need to move the whole supply chain in cadence… There have to be investments in new lines or it's going to require overtime, which negatively affects gross margin,” said Musk, in their earnings conference call. Also, according to Seeking Alpha, Tesla has aggressively discounted its Model S and Model X vehicles to maintain the sales levels. And because of these discounts, they are racking up higher losses. But Tesla’s diminishing cash position makes steeper discounting an untenable option. And further complications include the rise in interest rates and commodity prices, cobalt prices have shot up from $10 a pound to above $37. In addition to these cost increases, the recent resignation of their chief accounting officer and controller, Eric Branderiz undoubtedly made a few investors nervous. He isn't the only high-profile departure, a month earlier John McNeill, who was head of the sales and service group, resigned from the company. Bloomberg reported that Branderiz, who was hired in October 2016, had a base salary of $300,000 per year. But potentially his most attractive benefit was a $5 million stock equity award, to be fully vested only after four years of service. This clearly suggests that Branderiz, regardless of his reasons, left a great deal of money on the table with his early departure. These developments definitely make the situation more complicated for a company that is aggressively piling up debt. 

According to David Trainer of New Constructs, Tesla hypes itself as being long-term focused, but it appears that the company spends more time and effort on publicity stunts, such as sending a Roadster to Mars, than on achieving its own production targets. He added that if Tesla can’t hit simple production targets, it’s hard to take them seriously about anything. Further, Trainer sees Tesla as a distant challenger to the leading car companies such as Ford and Toyota. And while Tesla may have the competitive advantage with its high quality electric vehicles in the EV market today, Tesla will start to face increasing competition from the more established auto makers. Moreover, competition will likely increase dramatically in the EV market over the next two decades, according The Economist magazine. The magazine reported that while today the EV market only accounts for a small niche of vehicle sales, about 1.5% of the new-car market in America and 1% of cars sold worldwide, the EV market will explode to between 10% and 15% of the market by 2025. And this is just the beginning, the indications are that in all probability the European Union will outlaw all petroleum and diesel fueled cars by 2035, and the western European car market will become completely electric. Further, Britain, France and China have all recently announced that all internal-combustion engines will banned from their roads by 2040.

The worldwide car market will change by startling leaps and bounds over the next two decades. Nevertheless, a number of car makers such as Honda, Toyota, Hyundai, GM, Mercedes-Benz and Volkswagen are hedging their bets with hydrogen fuel-cells, instead of going all-in on cars powered only by a lithium-ion battery. Mercedes will soon introduce a plug-in hybrid SUV that combines a battery pack with a fuel-cell generator. So the next step in hybrid technology is an electric vehicle capable of generating its own electricity with a fuel-cell. Yet, Elon Musk stated in 2015 that fuel cells for use in cars will never be commercially viable because of the inefficiency of producing, transporting and storing hydrogen.  

Regarding Tesla's stock itself, the company launched its IPO on June 29, 2010, trading on the NASDAQ, under the ticker symbol: TSLA. It was originally offered at a price of $17 per share. So a $1,700 purchase (100 shares) at the IPO price would have grown to just under $35,000 today. Moreover, the stock performed outstandingly in 2017, rocketing up from a low of $178.19 in November of 2016, up to a new all-time high of $389.61 in September of 2017. Since then, the stock has been stuck in a sideways consolidation, bouncing up and down between $292.63 and $360.50. Any sustained selloff could push the stock down to its 200-Week moving average, this key support level is currently around $251.

The 200-Week moving average proved to be an optimal place to purchase shares on two previous occasions.  Conversely, given the abnormally high amount short interest in TSLA, a breakout above $389.61 could easily send the stock soaring over $500 in short order. TSLA would be propelled higher, aided by a short squeeze that would send short sellers scurrying to buy shares to cover their short positions. A short sell is a bet against a stock, and short sellers profit when the price of a stock drops. TSLA is clearly a stock that short sellers love to hate. Currently the short interest in TSLA is equal to roughly 30 percent of the shares available for trading (the float). By comparison, the short interest for Ferrari NV (NYSE ticker symbol: RACE), which Investor's Business Daily ranks as the best stock in the Auto Manufacturers Group, is only 3.5 percent. And the short interest in RACE has remained low, even after the stock shot up 80 percent to $131.20. Perhaps the short sellers are not as enthusiastic about shorting the stock of a company that actually makes a $3.50 per share profit, and pays a .69 cent per share dividend. It should also be noted that in January at the Detroit auto show, Ferrari CEO Sergio Marchionne said that Ferrari NV will make a new battery-powered supercar to challenge Tesla Inc. at the high end of the electric car market. Marchionne also said that the time is right for a shift in the industry, and that by 2025 fewer than half the cars sold will be combustion-powered, as gas and diesel give way to hybrid, electric and fuel cell drivetrains. He also predicted that car makers will have less than a decade to reinvent themselves to survive in the world of new technologies.

Tesla is clearly on the cutting edge of coming changes in the auto industry. But that wave of change only looks like a little ripple now. Being the first mover in an industry is no guarantee of eventual profitability, or even of survival as a going concern. Tesla is one of the most ambitious and dynamic companies to come along in the past decade. The question is will Tesla run out of borrowed money before it gets a chance to actually ride that wave of change? Only time will tell.