Model 3 Sales Plunge
Hardly a day goes by without some new revelation by Tesla Motors or its eccentric founder, Elon Musk. After reporting a surprise profit in 2018’s third quarter, Tesla’s fortunes have since stalled.
Tesla sold 140,000 of its “affordable” Model 3 in 2018, easily dominating the field for plug-in electric vehicles. Including the model S and model X, Tesla’s sales were nearly 200,000. Tesla accounted for more than 50% of all electric vehicle sales. (https://insideevs.com/tesla-model-3-sales-december-2018/).
Federal subsidies of $7,500 per vehicle were sliced in half on January 1, 2019. Buyers, anxious to take advantage of the rebate, drove December sales of the Model 3 to a very impressive 25,000.
Tesla responded to the lowered subsidies by cutting prices not once, but twice, in 2019. The price drops have been very large on the pricier Models S and X, reportedly $30,000 or more for loaded models.
Despite the aggressive discounting, Tesla’s sales of its Model 3 have literally fallen off a cliff. Electric vehicle industry blog InsideEVs estimates that only 5,750 Model 3’s sold in February and 6500 in January. (See above). Musk has neither confirmed nor denied the estimates but he has told investors to expect a loss in the First Quarter. (https://www.bloomberg.com/news/articles/2019-03-07/musk-endorsed-blog-says-tesla-sales-have-slowed-early-this-year).
The price cuts have all but obliterated Tesla’s profit margins forcing it to take some extreme corporate action.
“The Wait Is Almost Over”
The “Wait” was for a Model 3 with the very affordable starting price of $35,000. Musk has promised to have the Model 3 available at that price point since 2016. Despite this promise, the Model 3 has started at nearly $43,000 and run as high as $70,000 very easily with the inclusion of longer range batteries and auto-pilot.
The “Wait” was anti-climactic to say the least. While Musk said that Tesla WOULD offer a Model 3 at $35,000, the car would only have a range of 130 miles, about half of that offered by its other models. A longer range battery would be available for another $2,000 and a “partial” premium interior for $2,500. Auto pilot runs $5,000. (https://www.zerohedge.com/news/2019-02-28/tesla-tumbles-musk-mystery-announcement-appears-disappoint).
One aspect of the announcement was a shocker. Musk announced the closure of nearly all of its dealership network. As recently as December, Tesla opened 27 new sales offices. Now, all sales will be conducted on line or through a phone app. Interested buyers will not be able to “test drive” a Tesla, but can return a car for a full refund within 7 days or 1000 miles.
Investors saw the announcement as confirmation of problems in demand but the bad news did not stop there.
Consumer Reports Downgrades Tesla Reliability
On February 21st, Consumer Reports removed its “recommendation” for the Model 3 based on reliability surveys. In fact, only Cadillac and Volvo scored lower. (https://www.consumerreports.org/car-reliability-owner-satisfaction/tesla-model-3-loses-cr-recommendation-over-reliability-issues/).
Consumer Reports cited hardware problems as well as cosmetic defects in the paint, trim, and windows. Electrical problems were reported in the dashboard display.
But Consumer Reports is not alone. A survey conducted by “What Car” found Tesla’s reliability to be DEAD LAST among 31 car brands. Tesla’s rating of 57% was far below next worst Land Rover at 76%. Every other brand scored in excess of 82%. (https://www.whatcar.com/news/2018-what-car-reliability-survey/n17826).
Musk Continues War With the SEC and Short Sellers
Last summer, Musk tweeted that he had secured financing to take Tesla private at $420 per share while the stock was trading at $350. The peculiar number, $420, is a very thinly veiled reference to marijuana, which Musk openly smoked during a podcast. This communication was a CLEAR violation of SEC disclosure rules and was found to have no basis in truth. It was suspected that Musk’s tweet was directed squarely at scaring off Tesla’s HUGE legion of short-sellers. “Tesla Driving Off The Cliff?”. (https://markonomics101.com/2019/01/06/tesla-driving-off-the-cliff-chart-of-the-day-9/).
Selling short is a method to profit from the expected, or hoped for, decline in a stock. Typically, the practice of professionals and hedge funds, short selling involves SELLING HIGH first and then BUYING LOW. Tesla is quite possibly the most hated stock in America among professional investors and the most shorted. Musk has frequently complained about the depressing effect of short sellers on the stock price. Suggesting a takeover at a premium price of $420 would force short sellers into losing positions.
Tesla has a “float” of about 125 million shares, with about another 45 million held by insiders, mostly Musk. “Short Interest”, or the number of shares held short, is an astronomical 25 million shares or 20% of the float. (https://finance.yahoo.com/quote/TSLA/key-statistics?p=TSLA).
Key Executives Race For The Exits
Under the terms of the SEC sanctions against Musk, he is NOT allowed to tweet without prior approval of the company’s compliance counsel. Musk ignored this requirement and tweeted production numbers and other projections, clearly falling under disclosure laws. When queried about a series of tweets, Tesla’s counsel acknowledged that Musk had once again gone rogue and abruptly resigned after only two months. (https://www.zerohedge.com/news/2019-02-26/musk-slams-sec-after-decision-hold-him-contempt-court).
Tesla has LOST TWO General Counsels in 2019 alone. Equally disturbing is the sudden departure of CFO Deepak Ahuja. Tesla has lost some two dozen key executives in the last year. Most of the executives did not leave to pursue other, possibly more lucrative positions. The exit of the CFO cannot be understated. Questions regarding Tesla’s accounting have plague the company and are now intensifying as confidence in Musk is fading. (https://www.businessinsider.com/tesla-executive-departures-list-2018-9).
Why Is Musk Mortgaging His Mansions?
Bloomberg recently reported that Musk has taken out mortgages on 5 homes totaling $50 million. The action has raised eyebrows. In addition to the residences, Musk pledged 40% of his Tesla shares as collateral for other loans and possibly part of his stake in Spacex. (https://www.zerohedge.com/news/2019-02-22/elon-musk-takes-out-50-million-new-loans-mortgaging-five-homes).
Tesla’s Unrealistic Forecasts Shake Investor Confidence
Musk has long maintained that Tesla would produce and sell 500,000 Model 3’s in 2019. This projection flies in the face of falling demand and production issues.
Despite the layoffs of 7% of Tesla’s sales and technical staff, Musk still plans to release a new SUV and Roadster by 2020.
The stock, pictured on the left, has gone nowhere in the last 5 years, despite impressive sales growth. Tesla still sports a sizable market capitalization of nearly $50 Billion, placing it ahead of every US automaker.
Wall Street price targets for Tesla vary from as low as $23 to $500. The average is $312, roughly 15% higher than current levels. (https://www.tipranks.com/stocks/tsla/price-target).
While Tesla remains near the bottom of reliability, it boasts a very loyal customer base. Owners have ranked it number one in owner satisfaction since the very first model was introduced.
However, Tesla has had very little real competition in the high end plugin market. In 2019, that will change. Porsche, Audi, BMW, Jaguar, and Aston Martin are readying their own “Tesla killers”. Existing models, such as the Nissan Leaf are introducing next generation cars with higher capacity batteries and longer driving ranges. More competitors are slated for 2020.
Tesla has had virtually no real competition until now. Maintaining its dominant position in the plug-in market will prove to be a sizable challenge.
One To Avoid
Perhaps no company sports as wide a disparity between its rabid and devoted fans and its detractors. Its no wonder. Not only does the information provided by the Company often contradict itself, but corporate changes are sudden and sometimes appear whimsical.
Some of Tesla’s greatest critics believe that the Company, in light of dismal Model 3 sales, is no longer viable. While the Company still reports more than $3 Billion in Cash, it has absolutely NOT demonstrated the ability to make a profit without the assistance of Federal Subsidies. Now reduced to $3,750 per vehicle, they will completely terminate on January 1, 2020. At that time, a whole slew of high quality plug-in options will be available to interested buyers. In addition, it remains questionable how sales can grow, if nearly all the dealerships are closed.
The information provided by this company is highly unreliable. Recently, Musk was asked about the profit margin on the Model 3’s following the layoffs and other corporate restructuring moves. He refused to answer.
Accordingly, investors would be wise to avoid this company entirely. If the basic information is poor, any investment decision must also be poor.
What do the exiting insiders know that has yet to be disclosed?
Be Informed, Not Misled!