Tesla's (NASDAQ:TSLA) earnings for the fourth quarter offer a mix of good and bad. The stock was up after hours as revenues came out above expectations, but today's pullback showcases investor's timidity over the wild expenses of the wannabe automaker. I'm still bearish. The company faces experienced competition that I believe is more in touch with general consumers.
Up until this point, the company has made its name off of being a niche electric car brand for wealthy enthusiasts. Now Elon Musk is pressured to actually make money. To do that Tesla needs big volume sales, which will be tough to accomplish with increased competition.
Shareholders are taking on far too much risk as the stock is expensive. If the upcoming Model 3 fails to live up to the hype, investors may be in a difficult situation. Even if the company profits, those profits are likely already priced into the stock.
The future of the company revolves around its ability to produce and sell an affordable, high volume car that will make them money (a revolutionary concept to these guys). That car is the Model 3, which is currently in large-scale production.
If the company couldn't succeed as a luxury electric car company (where gross margins are 20%), what's to say it can as a large-scale automaker (where margins shrink and competition drastically increases)? That's the question that nobody seems to want to ask. Solar energy, electric cars, none of it will appeal to the masses without a lower cost incentive than traditional forms of energy.
For the final quarter of 2016, Tesla beat analysts' estimates by 4%. bringing in $2.28 billion in revenues. Losses in earnings also improved as diluted earnings (GAAP included) per share were ($0.78) vs. ($2.44) last year. For the year, Tesla also reduced its losses to ($4.68) vs. (6.93) in 2015. This is obviously great news to shareholders worrying that losses would continue to increase. That being said, its loss was still greater than expected.
Right now, Tesla has $3.39 billion in cash. They're expecting to spend up to $2.5 billion to get the Model 3 going. With around $1 billion left, the company will have to raise more capital, especially as they try to increase production. Elon Musk himself alluded that he'll likely pursue another capital raise soon in order to maintain safe cash levels. Let's not forget, Tesla won't even be delivering the cars this year. The Model 3 is projected to deliver in 2018. Until then, the company only gets $1,000 from those on the waiting list. Musk won't even reveal how many orders have been placed.
You have to ask yourself when will investors say enough is enough? Selling more shares will further dilute the stock, making current valuations even more outlandish. On paper, this will make losses per share seem less drastic, but will also diminish earnings (should there be any). The company's established competitors are more appealing. Ford (NYSE:F) made $4.6 billion in profit last year, pays over a 4.7% dividend, and still has a P/E of less than 11. Tesla has a lot of debt and a smaller "niche" market yet warrants a stock price of $257 a share? The speculation is out of control.
Musk wants consumers to conform to his rules of what the auto industry should be. Consumers don't do that. The masses will not patiently embrace his crusade to change the world unless Tesla offers incredible value. Dishing out $35,000 for a Model 3 that travels less than 300 miles doesn't live up to that idea. On top of that, where is the infrastructure needed to service these cars? Yes, it's been noted for some time that there is far less servicing work required for an electric car.
The concept isn't that far off from a glorified golf cart. But if it does break, you can't just run it down to the town garage to have it worked on. For that reason alone, it represents a hassle in life that people don't want. This is especially relevant considering the massive infrastructure of Tesla's competitors. General Motors' (NYSE:GM) Chevy Bolt has an entire grid of dealerships laid out across the country for auto issues. People want convenience. Tesla is not convenient.
The inflated stock price operates under the assumption that Tesla is going to revolutionize the car industry and become the dominant player. The irony is that nothing they're doing is really that revolutionary. Green cars already exist.
Other automakers can make E's faster and better. Chevy's Bolt was built and put on the market in less than a year and a half. I'll say that again. Chevy built a competitor to Tesla's upcoming Model 3 in less than two years. Musk has been touting his revolutionary affordable EV for years and it's still not on the road. Furthermore, GM is a profitable company. It can afford to build its EV segment without the "make or break" situation that Tesla finds itself in.
Ford really stands to disrupt Tesla's plans. In the next five years (the time horizon for Tesla's goals of selling 500,000 vehicles a year), Ford plans to bring out 7 (out of a planned 13) electric vehicles. These include an EV Mustang (I know, sinful), 2 EV police vehicles, an electric transit van, and an F-150 hybrid. The sheer variety and volume that Ford is going for is evidence enough that Tesla will not be the dominant player in electric cars. BMW (OTCPK:BMWYY) and other luxury car companies are also in the process of making electric cars. The segment is not exclusive to Tesla.
Another thing to consider in this equation is brand loyalty. Loyalty rates are particularly rising in non-luxury segments (Subaru and Ford have 56.3% and 55.8% customer return rates!); the exact segment that Tesla is targeting with the Model 3. People who buy Ford are often devout. Those who have a Prius are very unlikely to be swayed to leave Toyota (NYSE:TM).
At this point, the demand for electric cars is still limited compared to combustion engines. There's nothing wrong with clean transportation, but I will buy a gas engine until they're literally banned from the earth. They're just more fun, and uncompromising/powerful in terms of offroad/hauling capability. If you're an outdoorsy kind of guy like me, Tesla's don't cut it. These electric cars are great for a commute to work, but that's about it. Because of this, Tesla will not be "conquering" the auto industry any time soon. At best they'll become a "part" of it.
Not worth the risk
I am not alone in my views. Yesterday, Goldman has downgraded the stock to a sell. Consequently, shares have fallen a further 5% today. They cite the variables of cash, a bad solar business, and the challenges of gearing up the Model 3 as its main detractors.
If you're already invested in this thing, good luck to you. If you're not, it makes very little sense to get involved when there are far more reasonable options. There are just so many variables. How much cash will Tesla burn through this year? Will sales of its expensive models continue to provide cash flow while the company pushes the model 3? How will the company afford the infrastructure for vehicle maintenance?
There's no way they can match up to the manufacturing/logistical power of competitors like GM or Ford or Toyota. I've no doubt Tesla will create Model 3 inventory and sell them. I have every doubt that Tesla will make the kind of money necessary to be valued at over $200 a share. This is especially true when the price-to-earnings multiple of its competitors is around 10 to 14. For that reason, it doesn't make sense to buy the stock.
I also have serious doubts about the ability of Elon Musk to get this done. He's shown that he's not 100% committed to getting these cars moving. He's dragged Tesla into solar (a move which created a lot of debt), and he's obsessed with SpaceX. While innovators and entrepreneurs are always a little eccentric, Musk seems to lack the concentration to do one objective at a time. While he's drifting in different directions and attempting to merge all his dreams into one, he should be concerned with getting the cars (the one part of his businesses that might be profitable) sold to customers. That's the only thing that his competitors are thinking about.
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