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Tesla Still Stuck In The Mud In China

Feb. 04, 2019 3:03 PM ETTesla, Inc. (TSLA)333 Comments
John Engle profile picture
John Engle


  • Tesla claims its planned Shanghai factory will be up and running by the end of 2019 producing 3,000 Model 3 sedans per week.
  • The company claims the cost of construction to hit that production rate is about $500 million and that this will be paid for almost exclusively via loans from Chinese banks.
  • Tesla's claims defy all data concerning auto plant construction in terms of both cost and timeline - the ambitious projections are not supported the experience of seasoned automakers.
  • Meanwhile, funding from local banks is still not secured; Tesla's negotiating power deteriorates as the year wears on, playing into lenders' hands.
  • As Tesla's lofty China goals collide with a harsher reality, expect significant downward revisions to guidance and analyst estimates. The share price will follow them down.

Automakers rarely enjoy rich earnings multiples. Most are well-established businesses with most growth trajectories operating in a cyclical industry, so they rarely trade at rich valuations. Currently, the S&P 500 Automobile Manufacturing Index implies a forward price-to-earnings ratio of 6.2. Tesla (NASDAQ:TSLA) is a glaring exception: The upstart battery electric vehicle (“BEV”) company trades at a staggering 43.2 times forward earnings.

Tesla enjoys a massive forward multiple thanks to ambitious expectations of monumental growth across production, revenue, and profits over the span of just a few years. The problem for Tesla is figuring out how to get to the level of production and profit implied by its valuation in time - and at a cost it can afford.

One of the key components of Tesla’s growth strategy is its proposed Shanghai factory, which it claims will be able to produce 500,000 vehicles per year once complete. It also claims that the Shanghai Gigafactory will be up and running - and producing vehicles - before the year is out.

While Tesla has become somewhat notorious for making over-the-top promises regarding the cost and timeline of projects, the Shanghai proposal appears to be setting a new bar for optimism. Indeed, Tesla’s claims about construction speed and cost look increasingly fanciful.

In 2019, investors should expect Tesla’s high-flying stock price to waver as the reality of slower than promised growth sets in.

Fanciful Cost

We have discussed Tesla’s Shanghai factory before on Seeking Alpha and have made it quite clear that the company’s claimed timeline and construction cost estimates are wildly off the mark compared to industry peers.

In August, Tesla claimed the all-in cost of the Shanghai Gigafactory would come out to $2 billion. On its face, this cost looks radically optimistic. Auto analyst Bertel Schmitt recently pointed out that the starting cost of building an auto

This article was written by

John Engle profile picture
Investment professional specializing in deep value opportunities, growth plays, special situations (long + short) across a range of asset classes and industries.Current Role(s): President, Almington Capital Merchant Bankers; Chief Investment Officer, The Cannabis Capital Group.Asset Classes: publicly traded securities (stocks + fixed income), private equity, real estate, venture capital, cannabis, fintech.https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:42612986Education: MA, Trinity College Dublin (economics + philosophy); Diploma (finance), London School of Economics & Political Science; MBA, University of Oxford.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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