By Parke Shall
Sometimes with investing there is no financial analysis that needs to be done. A good portion of investing is sometimes left simply to common sense. We can go in and create a discounted cash flow model of any company out there and draw our conclusions accordingly. But there also is something to be said for looking at the psychology of the way a business acts and trying to make a judgment based on common sense.
It is for this reason we believe in something fishy could be going on at Tesla (NASDAQ:TSLA).
Let's say right off the bat that we are not accusing the company of breaking the law or fraud or anything of the sort. But what we are noticing is an overwhelming number of employees at the executive level turning over and leaving the company. It is getting difficult to ignore.
This is not the first time we have brought this up, and we have waited to bring it up again because we were writing executive departures off as part of the normal course of business. When we saw last week that another senior executive had left Tesla, and we saw Bill Mauer's article which paid homage to our title from mid 2015, we decided that it probably wasn't that big of a deal.
However, at the end of last week, we awoke to brand-new headlines about another executive leaving the company, just days after the company's top spokesman left.
It was disclosed mid week last week that the company's Executive VP of Finance and Worldwide controller, Michael Zanoni was leaving to return to Amazon.
This would certainly look less meaningful if it didn't come just a week or two after the company's top spokesman called it quits as well, ahead of the launch of what is supposed to be one of the company's key products,
Ricardo Reyes has left Tesla Motors Inc. after less than 18 months as vice president of global communications just as the electric-car maker prepares to sell its most important new model.
A Tesla spokesman confirmed that Reyes has left the company. He had the top communications job from November 2014 until recently. Reyes declined to comment on his departure.
When we last looked at executive departures, we looked at one of Tesla's key China executives leaving the company and we questioned the reasoning behind it. What we found out days later was that the company's performance in China was missing the mark, and so we had what we believed to be a far more common sense explanation as to why this executive may have left.
Following the CFO's departure thereafter, the company posted a lackluster quarter.
What could the departure of the VP of Finance and top spokesman mean?
When the company's CFO stepped down, we issued an article which was attacked by Tesla bulls as lacking substance and objectivity. What we have seen then from that point is a company that has come out and said that they are not going to need cash when most analyses have arrived at the conclusion that they will need cash.
We have been saying for months the company is going to need cash and a recent SA article out over the weekend prognosticates a $2 billion equity offering this spring.
We have a company that doesn't seem to be capable of making money and that has expanded to a market cap close to automakers like Ford (NYSE:F) and General Motors (NYSE:GM), but isn't yet generating a profit.
At what point does the extreme turnover in the senior positions and executive positions start to become alarming to Tesla investors? As shorts, we've noticed it, and we think it's a feather in the short case's cap.
In another "rare event getting less rare," analysts at S&P Global came out on Thursday and issued a downgrade of the company, saying it was time to take profits after this run back up to the $220 range.
Tesla Motors Inc. is facing "significant" risk its plans may not work, and its stock is too volatile as the electric-car maker prepares to unveil is mass-market sedan, the Model 3.
That's from analysts at S&P Global Market Intelligence, who on Wednesday took their recommendation on Tesla, +2.32% stock a notch down to sell. They kept their price target of $155 on Tesla shares, which is around 30% lower than current prices.
Tesla's sales and earnings are expected to "surge" this year, but "we see significant execution and valuation risk in the premium-priced stock," S&P analyst Efraim Levy said in one-paragraph note to clients.
We have long been supporters of the argument that the company belongs in the low to mid $100 range, at least for the time being until they can show that they can turn a profit.
It seems like analysts may be coming around to reality (slowly, and finally), recognizing that it is not the best stock to be in from an operational performance standpoint, nor may be the best stock to be in if the broader market starts to correct once again. The company has essentially no foundation to fall back on, but for the amount of revenue its generating and its name and notoriety - they make a superior product, they just don't make cash.
We spend a lot of our time performing analysis on companies based on the numbers. We've done this analysis with Tesla and it has given us the conclusion that we do not want to be invested in the company. As a matter fact, we put on a short position recently as the company went through the $200 range and back up near toward its highs. Anybody can perform a cash flow analysis or an income statement analysis on Tesla and tell you that from a profitability standpoint it is certainly not going to be your best bet.
But again it is important to embrace a little bit of common sense and some of the psychology behind what is happening at the business.
When you see executive turnover the way that we are seeing it at Tesla over the last year and a half, one has to eventually raise the question of whether or not there is something else going on behind the scenes at this company where it shareholders hold it up to basically be perfect.
Is there a chance that the company is not operating perfectly?
Is there a chance they may not meet their guidance for the coming year?
Is there a chance that morale on the inside isn't very good?
We raised this last issue about a year and a half ago when Elon Musk was late to the company's conference call. We questioned his dedication to the business on more than one occasion and we think that if the morale and cult like status of the company starts to fade, it could take the sell side and many retail investors down with it.
One way or another, whether it's financially or through other means, we think Tesla is going to have to face the reality of its operations. It is not generating cash, it has no margins, executives are leaving, and we continue to believe they will have to issue equity to continue operating. We are short Tesla.
Disclosure: I am/we are short TSLA.
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.