Why I Sold My Tesla Stock: Confessions Of A Long-Time Shareholder

| About: Tesla Motors (TSLA)

Summary

Both the automotive and battery businesses are richly valued with significant execution risk.

SolarCity acquisition more than doubles debt and delays the path towards profitability.

Masterplan Part Deux is exciting, but distracts from near-term headwinds.

The risk/reward at $230 per share does not make sense to me.

Intro

Emotionally, I love Tesla Motors (NASDAQ:TSLA). Elon Musk is by far the most inspiring and ambitious CEO I can think of. The company is changing the world by electrifying our transportation system, and as a self proclaimed tree hugger seeing that dream turn into reality is remarkable.

Some of my older follows will recall my pieces on Tesla in 2012 (I, II, III, IV). I'm a Tesla/Elon fan boy and have been for quite some time, to say the least.

However, I'm not an emotional investor. At $230/share Tesla is trading with a market cap of $35B, assuming 150M shares fully diluted. For a company that produced GAAP revenue of $4B (with a gross margin of 23%) and negative $717M in operating earnings in 2015, that's pricey.

There's no single reason or fact that led me to liquidate my Tesla investment. The bottom line is it was a gut feeling fueled by a wide swath of factors.

In this video I will break down all of my gripes with Tesla and why cumulatively they led to a decision to sell the stock.

In Summary

I hope to be able to own Tesla shares at some point in the future, but with the impending SolarCity (NASDAQ:SCTY) merger and such a rich valuation, my hands are tied for now.

The combined company will have more than $5B in debt and will require additional capital to get to cash flow breakeven. This could easily result in significant dilution for shareholders if a raise isn't done on Tesla's terms.

If a recession were to occur, the luxury electric car market will take a hit, and Tesla's already fragile business model will look even weaker.

The risk/reward profile for Tesla Motors at $230 per share just doesn't add up. Even if the company executes flawlessly and auto sales triple to $15B, it's still difficult to justify paying $35B. The standard P/S valuation in the auto industry is well below 1X. Tesla's current valuation of 7X (assuming a $5B run rate) is astronomical relative to industry norms.

On the downside, bankruptcy is a very real possibility, if there's a hiccup in the economy.

All this was exacerbated by the SolarCity acquisition. SolarCity's financials are unreasonably complex, and the company's GAAP operating losses and net debt position continue to climb at an alarming rate.

To be clear, I sold all my shares before the potential merger was announced. If my understanding of SolarCity's financial situation is correct, the company is quite distressed, with its debt yielding 20%.

The fact that Tesla was supposedly on the cusp of profitability before this was something I had been waiting years for. Seeing that deadline get pushed back yet again only reaffirmed my decision to sell the stock.

Conclusion

Going forward the most important thing I will be watching is the cash utilization of the business.

If either Tesla alone or a Tesla/SolarCity combo continues to rely on cheap debt and a soaring equity price to fund loss leading operations, I will stay on the sidelines. Both these methods of raising capital are second derivatives of the Federal Reserve's zero percent interest rate policy, something I'm not comfortable betting on.

Tesla's ambitions are nothing short of incredible, but to really become an independent global leader in sustainable transport, they eventually need to make a profit. It's that simple.

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.