Tesla: Believe The Hype, Conditionally

| About: Tesla Motors (TSLA)


Tesla Motors is an innovative company and controversial stock.

Bulls will tell you that Tesla is the pioneer of the electric vehicle revolution.

Bears will tell you that Tesla is burning through cash, is not profitable and has too much debt.

Both are true. Here's what Tesla needs to do to become a viable long-term company.

Tesla Motors (NASDAQ:TSLA) is one of the most controversial stocks in the market, and perhaps the most controversial stock on Seeking Alpha as the most recent article regarding Tesla has over 600 comments in three days. Bulls and bears are well-acquainted with each other's arguments, but I will summarize both points of view briefly.

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(Tesla's Modex X showing off its falcon wing doors)

Bulls believe that Tesla is at the forefront of the electric vehicle ("EV") revolution and has immense growth potential. This is evidenced by its $30 billion market capitalization, despite only reporting $4 billion in revenue over the past four quarters.

Bears will tell you that despite Tesla's first mover advantage, the company has failed to reached its profitability and cash flow-positive targets and is burning too much cash to finance its capital expenditures and keep up with its debt obligations.

I think both sides have valid points. Ultimately, it will come down to execution. Tesla has massive potential and betting against the stock is essentially a bet against the ability of Tesla's management, mainly CEO Elon Musk, to actualize that potential.

Elon Musk receives a lot of criticism for his alleged inability to lead a business - the ideas are there but the execution is not. Another criticism I've heard oft repeated is that Musk's businesses all rely on government subsidies to survive. The former argument I guess is a matter of opinion, but personally I would wager that anyone with a net worth of $13.5 billion (as of March 2016) knows a thing or two about making money.

The latter argument is simply a load of crap. All business get help from the government is some form or another. Heck, General Motors (NYSE:GM) and Chrysler, now under the Fiat Chrysler umbrella (NYSE:FCAU), were completely bailed out of bankruptcy by the government while Ford (NYSE:F) also got a sizable payout. Additionally, in 2009, the Department of Energy issued loans under the $8 billion Advanced Technology Vehicles Manufacturing Loan Program, of which Tesla received $465 million. In 2013, Tesla paid back the loan nine years early, and before Ford, Nissan and Fisker did.

If you're against the government helping businesses out in general then that's another topic entirely. But if you want to level the criticism against Tesla and Tesla alone, I think that is being fairly hypocritical.

I think that Elon Musk can make Tesla a viable long-term company and I'll be watching one main thing to gauge how well he is doing: profitability.

I have been a TSLA bull for a while now and my thesis has been, like many other bulls, the sheer size of the potential EV market and the Tesla brand name. Revenue growth has been robust, but the company has fallen short of reaching its targets of becoming profitable and cash flow positive. Over the last 12 months, Tesla has lost nearly $7.00 per share and operating cash flow was far from positive.

The reason for these ugly metrics is that Tesla has had to invest heavily in its upcoming car model whenever it is reaching peak profit and cash flow from the previous model. This time around, Tesla is pouring all resources into the Model 3, and for good reason. The Model 3 is the fulcrum. Its success or failure will make or break the company, respectively. All of the company's past models have been leading up to this point - each previous model has been a means to this end. Elon Musk has long wanted to be able to release a mass-market EV and the Model 3 is his baby.

I think the Model 3 and the automobiles that succeed it from Tesla and other car manufacturers are an important step forward for sustainability. However, purely from the perspective of an investor, the Model 3 must be the catalyst for Tesla's profitability. After the Model 3's release, I will be keeping a close eye on profits because Tesla's current strategy of using the previous model to finance the upcoming model is not sustainable.

If the company's goal is what I expect it is, which is to get a mass-market EV released as soon as possible, then I have no problem with the cash burn and the lack of profits. But once Tesla achieves its goal, it will have to become financially responsible to retain any semblance of its current stock price. This is what I mean by the title: believe the hype, conditionally. Tesla is well-positioned with a lot of potential profitability, but has yet to prove it. The company has forgone profitability for good reason, but the point stands regardless.

I envision Tesla Motors as two distinct companies, separated by the Model 3. The first Tesla, which released the Roadster, Model S and Model X is meant to establish the Tesla brand, get investor interest, and generate capital. This capital chain eventually leads to the Model 3. The second company is one I expect to see after the Model 3 is fully released. This company will operate similar to established car companies and will produce new models and features at a slower rate, leading to a more stable business model of which both bulls and bears can approve.

From what I can see in the financial statements, the primary reason for Tesla's ugly metrics is because management has forsaken every traditional financial metric in order to achieve a mass-market EV as quickly as possible. That is a strategy I can get behind. However, the strategy is completely reliant on the success of the Model 3.

This is just my view on everything that the company has done to this point. You are free to disagree and to let me know in the comments section.

Lastly, and I've seen a lot of this happening, using past numbers to claim that TSLA's $30 billion is unjustified is naive. If the Model 3 is successful and Tesla adjusts its business model to resemble a traditional automobile company, $30 billion is not that unreasonable considering the Tesla brand, the untapped EV market potential and what I like to call the Elon Musk factor. He is a true innovator and his vision will lead Tesla in the direction of financial stability. Believe the hype.

My question to you, the reader, is do you think the Model 3 will be the success that makes Tesla great? Or will it be the flop that dooms the company and shareholders to oblivion? Feel free to let me know your response in a long-winded rant, a one-word answer, or somewhere in between in the comments section!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.