Tuesday, July 11, 2017

Next Stop For Tesla Investors: The Twilight Zone

Alexander Carabitses

A slow news week was suppose to conclude with the first production-spec Tesla Model 3 rolling off of the assembly line and into the garage of its proud papa, Elon Musk. Furthermore, the investment community had anticipated colossal returns, due to the vehicle's launch. Unfortunately for Tesla, things did not go as planned and the week ended up being manure for the brand.
(Image credited to Tesla)

Why? Well, to put it simply, Tesla shareholders are finally beginning to see the light, after Elon Musk himself admitted that the company's share price is much higher than it should be. According to Bloomberg, we ought to blame Tesla's "worst week in a year-and-a-half" on fear over anticipated quality problems that could occur when the car goes into full production, along with poor sales results.  With regards to quality, the main concern lies in the fact that Tesla technically isn't a mass-market automaker, and therefore has not had the experience necessary to deal with production problems that arise on the assembly line on a daily basis, while simultaneously trying to meet a high- volume, daily production quota.

In Tesla's defense, Elon Musk did revise his production estimates for the year, and after all is said and done, the max number of cars that he wants to produce in a monthly period will be 20,000 (in the month of December).  Furthermore, only 30 cars will be delivered this month, 100 in August, and 1,500 in September.  This incremental production increase should allocate the automaker more time to address and fix any production and quality problems that occur before the vehicle is produced at a high volume.  Believe me, the last thing that Tesla needs is to have a blown launch with a vehicle that, in theory at least, is supposed to be the end all be all to the company's survival.

The reason that I say "in theory" is because none of Tesla's existing lineup brings in a profit.  Bare in mind that the rest of the brand's lineup consists of a luxury crossover (a vehicle that should produce high-profit margins) and a large luxury sedan (another vehicle that should produce high-profit margins), but given the fact that these are powered by batteries and not internal combustion engines, the company cannot make a profit.  Now we have a small car that procures lower profit margins, to begin with, mixed with a powertrain that will kill any hopes of a profit until somewhere around the middle of the next decade. For the company's sake, I hope that the loss on each vehicle sold is not huge.
(Image credited to Tesla)

The main reason that Tesla's stock was valued beyond that of GM and other automakers is because the company is viewed as more of a technology company than it is an automobile company, meaning that investors don't expect an immediate return on their investment and are little more patient.  In the business world, this is known as cost-free capital.  I honestly do not believe that investors will be willing to wait another eight years to see a return on their investment though.  Keep in mind that this is still a car company, and cars take longer to develop than the iPhone, a product that is in its seventh generation in ten years, has a profit margin of 200%, and takes only two years to develop.

Since Tesla has never made a profit, I find it extremely odd that Bloomberg's analysts are pointing to rough sales figures for the quarter as being one of the deterrents to the company's value. Believe me, I trust Bloomberg's analysts but think that Tesla's investors are living in the twilight zone.

The last thing that I want to touch upon is Bloomberg's third reason for the decreased value of Tesla's stock. Apparently, the news that other staple automakers, such as Volvo, are planning to add more electric cars to their lineup played a key role in the value declination.  I said it earlier and I'll say it again, Tesla's shareholders have finally seen the light.  They suddenly remembered that other automakers exist and that these automakers also know how to make electric cars.  Once these electric cars hit the market, Tesla will be in big trouble from an image standpoint. Given that luxury automakers with a great deal of cachet, such as Audi and Porsche, are in the midst of developing electric cars of their own that aren't too far away, I can guarantee you that these models will win over the hearts of buyers faster than any Tesla ever will.  In other words, Tesla is currently a novelty because electric cars are a novelty, but once the novelty of electric cars wears off, so too will the novelty of Tesla.  This could probably even happen by the middle of the next decade when electric cars become profitable and demand is expected to heavily increase as prices come down.
(Image credited to Tesla)

I don't think that Tesla will be viewed as the second coming in the mainstream market either.  Quite frankly, there will come a day that the Toyota Camry and its competitors are offered with pure electric powertrain options at affordable prices; that will also be the day that Tesla can just say that it's present and accounted for in the segment.  Even if it sits as a standout manufacturer in the segment with the Model 3 for the time being, it's not like every buyer will flock to it because let's be honest, consumers still aren't ready for electric cars. Sure they may snag some potential Bolt EV sales because of the novelty factor I mentioned earlier, but aside from that, I'd think that more people would flock to the electric cars of the traditional automakers because they simply feel more comfortable buying vehicles that are produced by them.

None of these potential image problems mean that Tesla will go bankrupt, as that of course is to be determined by their supply of cost-free capital for at least the next eight years. What it does mean is that Tesla's stock should eventually fall back in line with that of the traditional automakers. With the investment community finally beginning to see that all of the automakers they've undervalued for years can do exactly what Tesla does, I anticipate that the value of Tesla's stock will fall.  Naturally, this won't happen overnight, and as things currently stand, no electric car is profitable, which gives Tesla its advantage (i.e. being a novelty). The novelty will fade when automakers are no longer scared to produce electric cars and people are not afraid to buy them.

To all of the Tesla fanatics out there, I'm sorry, but your beloved novelty automaker just got a small hint of what its future in the investment world may hold, and if you ask the CEO of any global automaker, they'll be the first to tell you that it ain't pretty.

Thank you for reading and have a good week.

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