Tesla's Terrible Timing

Summary

• Tesla delivery numbers fail to impress the street last week.
• Company tries to put a "band aid" on the situation by disclosing number of vehicles in transit on Friday.
• Market wasn't really impressed with this disclosure either.
• We believe a loss of confidence from investors and analysts, which is the company's key asset right now, couldn't come at a worse time.
• Elon Musk Tweets out new Model 3 pictures over the weekend, but can the narrative still move the needle without the financials?

By Parke Shall with Thom Lachenmann

Tesla (NASDAQ:TSLA) got hit pretty hard over the last week on worse than expected delivery numbers and a general loss of confidence from the sell side. Today we wanted to write an article on explain why the timing for both of these things couldn't have come at a worse time for the company and its investors, in our opinion.

It's been a long while since we have written about Tesla, mostly because there wasn't too much to update on when it came to the thesis. Put simply, we have been skeptics as the stock has just moved higher and higher. The way that we had left it with Tesla was that the company was surviving (and its stock thriving) off of its future prospects and its narrative. All the while, in terms of earnings power, the company had little to fall back on. That hasn't stopped the company from making an extremely impressive run over the last couple of years, appreciating significantly and performing extremely well as an investment for its shareholders.

TSLA data by YCharts

Not only did the company underwhelm the street last week when it posted quarterly delivery numbers of just 22,000 units, but it did so at the worst possible time. Then, instead of letting the market correct its share price, it rushed out mid-day on Friday to announce the number of vehicles that were in transit for the quarter (3500), something the company had always done as part and parcel with its delivery releases in the past. The first release and the changing attitude from the sell-side came at a bad time for the company. The second move simply made the company look a little bit desperate, in our opinion. In both cases, we believe the timing couldn't be worse for the company.

The miss on deliveries took an already sour Goldman Sachs (GS) and turned them into bigger critics of the company as they lowered their price target from $190 per share to $180 per share. Coming from an investment bank that helped the company compile its last couple of equity financings, this should be both noticeable and alarming to current Tesla investors. Goldman Sachs' price target on the stock is nearly 40% lower than the current price and could represent meaningful downside for investors, even from here. But really the most alarming thing about this price target is the fact that it shows a continued loss of confidence from the sell-side.

Why is the timing important here? If you are a believer that the market is nearing a top, like we are, this is ostensibly the worst possible time to lose the confidence not only of analysts, but of investors in a company that has no firm financial foundation to fall back on. It's not like Tesla is generating large profits, or any profits for that matter, each quarter. The company is surviving and watching its stock price appreciate on the assumption that they will be able to turn a profit somewhere well into the future. The space between what the stock trades for now and what its actual fundamental earnings are now is held up by the narrative; the believe that these assumptions will come to fruition. The narrative is held up by confidence. The company needs the confidence not only of Wall Street, but also by its investors in order to keep its stock price performing well. If you don't buy into the story that the company will one day be profitable to a large degree, then what is the point of owning the stock at a $50 billion dollar valuation?

TSLA Market Cap data by YCharts

A loss of confidence could be devastating for the company as it needs to issue equity in order to survive. The lower the price of the equity moves, the lower the price of the stock they will have to issue to fund the company. As the stock price moves lower, equity issuances become more and more dilutive and take their toll on previous investors. Arguably, like a startup seeking a venture capital, you would want equity raises to be performed at higher and higher valuations moving forward. For the most part, Tesla has been able to do that, But we believe this loss of confidence might help finally push the company into a downward cycle where the stock price moves lower into the company's next equity issuance.

When you combine that with the fact that we believe equity markets in general are about to correct, it's equally as negative for the company. When equity markets correct, investors flock to value, which are usually companies that generate cash and have a firm balance sheet. Money comes out of companies like Tesla that only exist on their narrative and have no tangible financial prospects in the near future. We believe the loss of confidence is very real, as denoted by the marked move lower in Tesla stock last week and we believe this is the worst possible time that it could happen for the company.

TSLA Price data by YCharts

On top of that, the company took the questionable action of coming out and releasing its "in transit" delivery numbers on Friday (linked above). This is the number that they usually would release with their delivery numbers, but for some reason, didn't this quarter. They stated that 3500 vehicles were in transit, still a lower number then previous quarters and certainly not large enough of a number to reinstate a little confidence in the company's prior quarter. Though the stock popped momentarily when they released the data, it then faded toward the end of the day on Friday. We think the reasoning for releasing this number is simple and the market saw this move for what we believe it actually was: a Hail Mary attempt at trying to stop the bleeding of the company's stock price. We think the market started to understand this based on the way the company traded at the end of the day Friday.

All told, it looks as though the one thing that Tesla needs to protect in order for its stock to do well, the narrative, may be starting to wear a little bit thin. At the same time, the overall market is looking as frail as it has in recent memory, especially in the technology sector. We continue to see NASDAQ names and technology companies with aggressive valuations get roped in over the last month, despite a small rally on Friday.

^NDX data by YCharts

In keeping with the idea of pushing the narrative forward, Elon Musk Tweeted out photographs of the new Model 3 over the weekend.

Whether or not the market will focus on the narrative or the numbers when the stock opens for trading next week remains to be seen.

Tesla is a risky bet here not only because of the changing market climate but mostly because it has very little financial foundation to fall back on at time where the market may require that from companies going forward. There is no tangible cash flow stream to try and discount right now without going out several years and there is very little equity on the company's balance sheet.

TSLA Shareholders Equity (Quarterly) data by YCharts

We believe it is the most vulnerable style of company out there heading into a larger macro shift in the market environment. There are arguably few worse times for the company to lose confidence from investors and analysts than right now, we believe. We would not want to be long Tesla into what we believe will be a period of coming volatility and a long overdue correction.

Analyst’s 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.