5 Reasons To Sell Tesla Now

Summary

• Tesla increased revenue by 68% during 2017, but every other operating metric suffered.
• Tesla has chosen to fund development with debt, which has left them over-leveraged and with a poor credit rating.
• Wall Street analysts expect 5% downside potential in Tesla's stock price.

What's most concerning to me about Tesla (NASDAQ:TSLA) is its 4.66x price/sales multiple. Most other domestic automotive stocks have a price/sales ratio below 0.5x. I will continue to assert that as long as Tesla's business is reliant on car sales, it should be valued as an automotive stock, not a technology stock. All of the issues that Tesla currently faces (i.e. low margins, production issues, capital allocation, etc.) continue to reaffirm this belief. This high valuation is indicative of expectations that are unrealistic and I believe that presents a tremendous amount of risk. Given where the stock currently trades, I believe now is an excellent time to sell and an opportunity to find value elsewhere. As I'll discuss below, Tesla's performance, financing strategy, and shrinking technology gap are all additional concerns.

1. Tesla's Valuation

Tesla kind of reminds me of Amazon (AMZN) where its valuation is just in the realm of fantastical nonsense. I've heard a lot of the possibilities. Sure there's a chance Tesla takes over the car world and brings solar power and battery banks to the mainstream. The idea of selling a car + solar + battery package is quite appealing. However, this is a long way off and I don't like to make investments on where a company might be in say 10 years. For every Tesla bull that points out some of these possibilities, there are just as many real life issues that plague Tesla today. For example, as I'll soon talk about, Tesla's financing strategy could be an issue and might even doom the company if there were a perfect storm of events (i.e. recession + credit downgrade). Tesla also has yet to show they will ever be able to produce a large amount of cars and continues to be plagued by production issues.

Since Tesla isn't profitable yet, using price/sales is probably the best valuation metric to use for comparison. When comparing Tesla to other car companies, there's just nothing that can make quantifiable sense. Ford's (F) price/sales is 0.26x and Tesla's is 4.66x. Tesla certainly has upside if the solar and battery businesses take off, but a difference that great has never made much sense to me. Also, consider that Tesla's current gross margins are not great either. Tesla still has the benefit of trading like a startup or tech company, but still has the margins of a car company. I believe that sets the stock up for a crash once a more realistic reality comes into focus.

F PS Ratio (TMM) data by YCharts

F Gross Profit Margin (TTM) data by YCharts

2. Tesla's Performance

Tesla's revenue growth has been solid the last couple of years, but all other financial metrics don't look that great. Gross margins, net income, profit margins, and free cash flow were all worse in 2017 year-over-year. Tesla also has consistently missed car production targets.

• Source: Google Finance

3. Tesla's Financing Strategy

One thing I fundamentally disagree with is how Tesla is going about financing its development costs and capital investments. Tesla has increasingly turned to the debt markets. This poses a number of real risks:

1. Interest rates are now increasing, which will increase Tesla's cost basis.
2. Tesla is a long way from producing positive free cash flow. Proceeds from new debt offerings are actually used to help pay for financing costs, which I hate to see. I don't think debt should be used so willingly unless it can be supported by a company's operations.
3. Tesla's credit rating already isn't that great and is at risk for a downgrade in the future.

Keep in mind that Tesla has had an absolutely golden opportunity to raise capital in the secondary markets the last few years. Sure it would be dilutive to Elon Musk and existing shareholders, but if you believe the stock is overvalued, this is a great way to raise inexpensive capital. Not doing this could easily look like a mistake if a recession hits sooner rather than later. Tesla's stock also has had a considerable amount of volatility historically.

4. A Vanishing Technology Lead

Tesla once had a considerable moat in terms of electric car technology, but other car companies are closing in. Here's a list of the cars with the longest all-electric ranges:

• Tesla Model S = 218 - 315 miles
• Tesla Model X = 237 - 295 miles
• Tesla Model 3 = 220 - 310 miles
• Chevrolet Bolt = 238 miles
• Nissan Leaf = up to 150 miles
• Volkswagen e-Golf = 125 miles

What's really intriguing here is Chevrolet's (GM) Bolt, which has a price tag of $37,500 and gets you 238 miles of range. Tesla's Model 3 starts at $35,000, but the slightly less price tag also gets less range (220 miles), so I basically consider the pricing as pretty comparable. So this really begs the question, does Tesla still have much of a technology lead if Chevrolet can basically produce a car with similar performance at the same price? It would appear not that much.

Tesla bulls are going to be quick to point out that the Gigafactory is going to reduce costs and give them a superior edge. I agree with the reduction in costs, but any car company (or any company for that matter) can do the same thing. The majority of big car companies are pouring significant capital into electric car development (a lot more than Tesla can), so I would not be surprised to see any technological advantage Tesla has today continue vanishing over the next five years.

5. Goldman Sachs' Values Tesla as an Automotive Company

According to MarketWatch, the consensus Wall Street price target on Tesla is $316.64. This target price indicates about 5.5% downside potential, but analyst's expectations are mixed. Goldman Sachs is a good example of a firm that's skeptical of the valuation and currently has a price target of $205. David Tamberrino points out something very interesting to me. The $205 price target assumes the automotive valuation is $171.00/share, Tesla Energy (i.e. batteries) is worth about $30.00/share, and SolarCity at about $4.00/share. A big reason I'm so negative on Tesla is that it's still an automotive company, which is what David's valuation breakdown indicates as well. Elon Musk always wants to reaffirm that Tesla is more than a car company, but the bottom line is that today and in the near future Tesla is still just a car stock. Once you boil it down to that, some of the valuation metrics just don't make sense and a price correction looks like a real possibility.

Conclusion

Investing in Tesla carries tremendous uncertainty. The market has what I think are unrealistic expectations for the stock. Anything could send it tumbling such as a slowdown in growth, more production problems, or downgrade in credit quality. As I've mentioned, I'm concerned with the massive premium Tesla trades at relative to other automotive stocks. Tesla's valuation is correlated with tech stocks or startups. This is even though Tesla shares all of the negative qualities (hint, hint) of auto stocks like low gross margins, macroeconomic risk, and production risk. Given Tesla's stock performance over the last five years and such a high-risk profile, I believe now is a good time to sell and recognize profits.

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.

Comments

[chicagotim1]

As an investor, I've found that objectivity is one of the best capabilities to lean on when evaluating investment opportunities.

My thesis re TSLA culminates in the notion that the company's valuation is at nose bleed levels, due, in part, to Musk's reputation as an innovator. I find it odd that his reputation for innovation should be challenged, as some in this thread have. By any standard I am aware of, Musk has a very impressive resume; his early efforts, which include refining internet search standards, and starting companies that formed the basis of PayPal, would probably be enough for most people over the course of their lifetimes. The link below is dated, but it only goes to show how early in the game most people recognized Musk's accomplishments.

But I'm still short TSLA via put bear spreads.

http://bit.ly/2tAHia7

[solucky]

" In the case of Porsche, we will surely be able to avoid the controversy of whether or not they will ever deliver one for $35k."

Porsche for the Model S 100, VW for the model 3, Seat / Skoda for the cheaper versions that follow . Maybee someone missed it but VWs massmarket car have the goal 7-8K below the model 3.and more range.

[User 7204261]

I want an all electric Porsche in a way I do not want an all electric Tesla.

[Randy Carlson]

eenk,

Well, I suppose different strokes... In the case of Porsche, we will surely be able to avoid the controversy of whether or not they will ever deliver one for $35k.

[kylethsmith]

Just a supplement to the technological advantage that Tesla used to hold. The announcement of the new Porsche Mission E a couple of weeks ago is also a pretty huge indication of Tesla's evaporating technological advantage. The Mission E has a range of 310 miles, which is in the upper range of Tesla's high end brands, but most importantly, it can charge 250 miles worth of range in 15 minutes! This is about twice as fast as Tesla's charging rate. The car's MSRP is also in the same range as the high end Tesla's, and the car is a sexy-as-hell Porsche.

While this might not seem all that relevant to the Model 3, it most certainly is, because Porsche is owned by Volkswagen. While Volkswagen may start by rolling out this technology on its high end Porsche brand first, because it is a high margin prestige brand, it means that the technology will filter down to its other vehicles once it makes business sense to do so. Considering that Volkswagen has committed $40B to EV's by 2030, I would not count on the technological battle going Tesla's way.

[User 35530125]

"The Mission E has a range of 310 miles, which is in the upper range of Tesla's high end brands, but most importantly, it can charge 250 miles worth of range in 15 minutes! This is about twice as fast as Tesla's charging rate."

---- One question, kyle: Where is the infrastructure to support that charging speed? A single unit at the factory? How long will it take for that supporting high-speed charger to make itself available where people need it, on the highways of the world and not in city centers? Tesla's moat isn't breached as long as Tesla has the reach. So far, no other OEM is willing to put out the money to build that infrastructure--they're willing to wait until somebody else does it for them. And those third parties don't want to either, because they won't make any money off of it until the network is effectively complete enough to permit cross-country travel in any country or region BEVs are available. For them, the money is in the cities, not out on the highways.

[kylethsmith]

Volkswagen is working with a consortium of OEM's (original equipment manufacturers) to build out a charging infrastructure network in Europe. In North America, they are going it alone, and investing directly in charging infrastructure.

Realistically, the charging network isn't actually all that much of a moat for Tesla. The cost of building out a network is in the tens or hundreds of millions, not the billions. That's a drop in the bucket for a company like Volkswagen, who has annual revenues in the hundreds of billions. This is also a worst case sort of analysis, because realistically, if a pile of car companies are wanting this to happen, they will work together on it, if third parties aren't providing the infrastructure needed.

Tesla's charging network, outside of its core market of California, is very much overrated, too. I don't know where you live, but I recently moved from Toronto (over 3 million people, 2 Tesla supercharging station) to Calgary (over 1 million people, 1 Tesla supercharging station just outside the city). There are, however, several third party providers (including one in the garage I park in).

Either way, the reality is that a supercharging network is a pretty insignificant moat, given how inexpensive it is to replicate, at least when view in proportion to the revenues of Tesla's competitors. Tesla knows this, which is why they have reportedly been talking to competing auto makers about opening up their network to other vehicle brands (you don't do that if that's your moat). Tesla's real moat was the technological advantage, which is evaporating. After all, how valuable is the supercharging network if its charging infrastructure is charging vehicles in half the speed of its competitors? Does that mean that Tesla will need to spend money upgrading its supercharging stations soon to keep up with competing technology?

Realistically, this is just the beginning of these innovations. EV's aren't going mainstream based on 45 minute charging times, when ICE vehicles can refuel in about 2 minutes. By the time EV's are mainstream, Tesla's current supercharging network will be obsolete, and it sounds like they are already getting there. Doesn't seem like much of a moat to me.

[solucky]

" Where is the infrastructure to support that charging speed?"

The car is a year underway and network will be build, first chargers still exist in europe and others are build. And sure Porsche can use also the slow 50 - 150 KW chargers

for exsample

http://bit.ly/2DcZ6rF

http://bit.ly/2G9gEYA

http://bit.ly/2Del1yL

[joeinslw01]

I have 6 years of reasons to buy Tesla (tsla) the biggest one is because the people who are telling everyone to sell Missed it 6 years ago when the stock was in the 30's, now they want to buy it but it's to expensive, so they try to talk the longs into selling so they can buy it on the cheap.
I have for 6 years of looking at short sellers saying longs should sell, and if I we had listened, we wouldn't be in the position we are today, just don't listen the chicken little sky is falling crowd, they have never been right about Tesla.

[Bill Cunningham]

"I have for 6 years of looking at short sellers saying longs should sell, and if I we had listened, we wouldn't be in the position we are today'

joe-What position is that? If you had sold three or four years ago, or even 6 months ago and reinvested in an ETF, you'd be much better off today. The situation is only going to get worse in the future.

[Randy Carlson]

Bill Cunningham,

I'm not sure one can be quite that certain about Tesla's future. They do have a great many things going on - semi trucks, batteries, cathode material process development work, solar cells / panels / roofs, storage, Model Y, Roadster II, additional GigaFactories, and probably a few things not yet known.

One can of course make any number of financial arguments against the company, and against particular ones of these opportunities. None the less, there is a very real possibility that any one or more of these my progress in such way as to further inflame market enthusiasm for the company.

[Bill Cunningham]

"any one or more of these my progress in such way as to further inflame market enthusiasm for the company."

Randy-I prefer economic success and profitability to "market enthusiasm." Since I'm a long term investor, it's ultimately a winner every time. Remember Pets.com?

[Victor Robert]

Just more BS ( Balance Sheet ) propaganda from a person who does not understand industry and business model disruption. Please watch Toney Seba's Ted talk on disruption or actually read his books.

Applying old auto metrics to a company new in its life cycle and one that is only about 10% built for its many addressable markets is not intelligent. Its high school level analysis. Nothing but ignorant accounting focus without a thought to capability or strategic positioning. Tell me if Tesla was not developing and deploying new technologies and business models that threatened incumbents then why is old auto tripping over themselfts to get into EV and ride sharing and power grid transformation? Never bet against Silicon Valley. You will loose.

Keep watch as Silicon Valley is coming for health care and financial services next. Block chain will revolutionize capital and credit markets.

[Andreas Hopf]

Tony Seba is a self-promoting charlatan and TED pep-talker, eager to score invitations to snazzy conference locations. To this day, not a single commenter, blogger or journalist could explain only a single true innovation that Tesla contributed to the automotive realm.

[joeinslw01]

How about the battle between the semi and the Model S, the driver of the model S walked away, the driver of the semi was hurt.
If that isn't a safety innovation you don't know innovation.

[User 35530125]

You mean the one in Newark, DE that happened about 2 years ago that put the truck on its side in somebody's front yard?

[Dansplans]

Negosav Stosic

AFAIK Tesla has done a recall on the suspensions for the first 3000 model 3. I would assume that the fix has been applied since then on all new production.

Frankly, with the grocery list of serious problems I have been reading about on the forums, I haven't been looking for suspension complaints.

[User 47429802]

Tesla's financial statements are wrong and will need to be restated to include the 100,000 - 200,000 Model 3 vehicles sold in the second half of 2017. Things are not as bad as they seem.

[Negosav Stosic]

Here is another sample:

"I picked up my Model 3 on Jan 2nd and am disappointed to find that I really do not like the ride. The suspension is very stiff and seems to magnify every bump in the road. Any significant seam in the concrete will leave me bouncing in my seat. On anything but a perfect road, I find it impossible to rest my head against the headrest or I'm constantly being jarred by it. Also, the steering wheel will vibrate considerably at highway speeds.

I have owned a Model S in the past and currently also own a Model X and this wasn't a problem for either of them.

I took it into the dealership and they seemed unable to say whether this was intended behavior. They reduced the tire pressure a bit but it hasn't helped to any great degree. The technician also suggested it needed to be "broken in" (something about the bushings) which wasn't very convincing.

Have other Model 3 owners noticed this? I understand suspension is a bit of personal preference but this seems at the really extreme end for a car aimed at a more mass market and autonomy."

[dlhatheway]

Stosic quotes, from elsewhere on the net: "I picked up my Model 3 on Jan 2nd and am disappointed to find that I really do not like the ride."

That's why I like to test-drive cars before I decide to buy them. Tesla's fans don't seem to have considered whether or not they'll actually like the way the car drives, whether it has enough headroom, whether they like the nightlines... etc, before they slapped their money down.

I guess, if you're buying "the future," satisfaction is not connected to actual experience with the vehicle.

[Negosav Stosic]

Here is another reason. The ride is poor on the model 3. Without an air suspension and with 42 psi in the tires, what do you think the resulting ride will be like? Here is a typical complaint from a new owner:

"The Model 3 is supposed to be "the first mainstream electric car" unfortunately the ride on city streets is very bumpy. All the other cars I have driven ride better on these same roads.
Here is another reason:

I have the 18 inch wheels which should be smoother than the 19 inch wheels. I have tried reducing the tire pressure from 45 to 42, but not much improvement.

Is there a way to adjust the sway bars? Even if it adds a bit of body roll?

I am very disappointed. "

If you lower the pressure, your range drops considerably.

[Andreas Hopf]

"If you lower the pressure, your range drops considerably."

Like you did with Ladas behind the iron curtain, to navigate bad roads. It just exemplifies what a joke this untested Model 3 really is, apart from all other shortcomings.

[slthomgr]

You referenced Goldman...what happened to Adam JonAss from Morgan Stanley,
Did MS dump all of their Tesla stock?

[User 48991021]

Hi, there is actually a huge mistake in the article. It says Tesla had a technology lead. However putting in a bigger battery doesnt make a technology lead. Teslarians may think otherwise but there is absolutely zero technology in Tesla. Tesla is just about bolting together parts. The only thing Tesla ever invented itself is a camera operated windscreen wiper system. There are a lot of things Tesla/Musk want to invent but so far they all don´t work. At least at Tesla. Tesla technology is all hype and marketing. Clever but not real technology. Next thing to be ordered will probably be DOMC as an extension of FSD. That is Driving On Mars Capability. Will cost you 5K but if you dont pre order it and wait for an OTA update it will cost you 6K.

[Andreas Hopf]

"Hi, there is actually a huge mistake in the article. It says Tesla had a technology lead."

I noticed that, too, but the level of occultism and worship has reached previously unseen levels, so it comes not as a surprise.

[DGrainger]

Greenhouse gas: you wrote “ The only thing Tesla ever invented itself was a camera operated windscreen system. “ not so. My first Lexus RX330 had that in 2004.

[Dddvalue]

Please do not insult Amazon by comparing to Tesla. Reality: Amazon turned profits 7 years into operation. Tesla is 14 years in and managed to achieve record losses year after year.

[Andreas Hopf]

Apple and Amazon don't build, ship and sell cars; expensive hardware.

Maybe you like this chart, mac800 http://bit.ly/2D2MHqa

Apple and Amazon are in a league of their own.

[hilarious]

See you at 100

[walter scott]

Tesla has a 90% downside potential.... Wall Street is all wrong!

[DisruptiveDave]

Love Tesla for innovation, but the company is a financial wreck based on just about any true financial metric. How can this company have a market cap 25% larger than Ford; it's absurd.

[chicagotim1]

Hi, thanks for the article, I appreciate the point of view.

A well done piece.

First, I am not a Musk/TSLA 'hater'; I actually hope TSLA succeeds. However, TSLA 's valuation depends on 'sizzle', IMHO (where things like "rockets", unrelated as they are to TSLA's business, nonetheless seems to have its place in hyping TSLA shares). Sooner or later, the firm will have to start generating earnings. "When?" Dunno. I think TSLA badly miscalculated the capital spend necessary to go 'big' with Model 3, although the market just does not seem to care at this point. And, I agree, it's a mistake to seek to prioritize debt as the primary means to finance the firm's capital budget. Although, honestly, I'd thought they'd have raised capital by issuing more equity by now.

The only operating metric I've seen that makes any sense in valuing AMZN is operating cash flow - although, even by this measure, I think AMZN's valuation is ahead of itself; at least AMZN generates gobs of OCF, that can be used to fund most of its on-going capital spend. Per FastGraphs, SP has AMZN at AA-, and TSLA at B-; sounds about right.

Best of luck to all.

[traveler501]

The recent flurry of negative writing here at SA is (to me at least) a very positive indicator that Tesla will be ramping up Model 3 successfully fairly soon. We have seen similar desperation with the past releases. I say this quite seriously; monitoring SA reactions (however contrarily) has been one of my most reliable predictors of TSLA behavior.

[Randy Carlson]

traveler501,

Tesla needs to be making a thousand cars a day +/-... They have been better at slipping schedule than they have been at making Model 3 cars.

If Tesla does make their target of 5,000 cars a week by end of June, the stock will take off.

The most likely scenario, in my view, is that they will fall short of 5,000 cars a week, but almost certainly report making cars at a faster rate than at the last reporting. The question then becomes whether and how tolerant the market will be of yet another shortfall in production...

Judging from the very large number of reservations for Model 3, one can easily imagine there being a market for half a million cars a year, world wide, assuming that the $35k base price configuration becomes available. Half a million Model 3 cars a year is 10,000 cars a week - 2,000 cars a day.

There is some question as to whether Tesla's Fremont facility can produce that many cars, and if not, Tesla needs another factory. If that other factory is needed and is not online fairly soon (single digit quarters), appreciable numbers of would be Tesla customers will escape to other carmakers as other Tesla competitive BEVs become available...

[Bill Cunningham]

"Judging from the very large number of reservations for Model 3, one can easily imagine there being a market for half a million cars a year,"

One can easily imagine that refundable reservations don't mean much, particularly when many of the reservations were either plays on the $7500 tax credit or strategies intended to flip the M3 at a profit. "Cancellations R Us"

[Analitik]

@Randy Carlson "The most likely scenario, in my view, is that they will fall short of 5,000 cars a week, but almost certainly report making cars at a faster rate than at the last reporting. The question then becomes whether and how tolerant the market will be of yet another shortfall in production..."

The AMOUNT of the shortfall must be taken into account. And the longer the delays go, the closer Tesla needs to get to their 5,000 per week target rate. Given the production estimates from VIN allocations that have been recorded, if the build rate is much lower than 4,000 per week by the end of the month, I see the tolerance being breached.

And then we get to the financials...

[joeinslw01]

Reading Seeking Alpha is like watching MSNBC which is totally against the President of the United States.......Totally Fake News, and I wouldn't be a bit surprised they won't publish this post, it will be deleted before you read it, that's how slanted these people are.

[Randy Carlson]

[e-mail],

The world is as it is, not the way you, or POTUS might wish it to be.

https://seekingalpha.c...

[Randy Carlson]

Tesla's price / sales ratio is ~10X that of established legacy carmakers it is true.

And, investors should reasonably ask themselves why that is.

Maybe it boils down to this. There is plenty of room in the world car market for Tesla to grow its current sales by 100X. There is not enough room in the market for a company like GM, Volkswagen or Toyota to grow sales by even 10X.

Think about that.

[grnnc]

wrong. You are assuming it is reasonable to assign a company which sells 100k cars per yr at a loss a market cap of 50 billion. It is not. Its current market cap assumes Tesla will sell millions of cars each year and it might but it won't be for at least another 10 years given their current "ramp".

[Bill Cunningham]

"Think about that."

Randy,

I've thought about it. TSLA us overvalued UNLESS sales increase by 100x. Other automakers are appropriately valued even if their sales don't increase one penny. THINK ABOUT THAT!!

[Poborsky]

100x the batteries needed. Not possible. Do some research.