TESLA Takes a “TURN” for the Worse (Chart of the Day 24)

TESLA Takes a “TURN” for the Worse (Chart of the Day 24)

TESLA Takes a “Turn” for the Worse (Chart of the Day 24)

On the left is the weekly chart for Tesla (TSLA).  The once high-flying automaker is at a critical crossroads.  The stock has recently traded BELOW $200, down nearly 50% in just a few months.

Tesla, and by extension, founder Elon Musk, has had both rabid fans and detractors.  Now it seems to be left with only the detractors.

Analysts at both Morgan Stanley and Wedbush recently turned very BEARISH on Tesla.  Morgan Stanley believes the downside case for the stock is now $10 per share.  (https://www.ccn.com/tesla-stock-headed-to-10-morgan-stanley).

According to the analysis, Tesla has a huge demand problem while facing a saturated market.  Used Tesla’s are more plentiful and emerging competition from Porsche, Audi, and Jaguar are ready to hit the market.  The remaining Federal subsidy for Electric Vehicles of $3,750 per car will be eliminated in June.   Any sales in new markets such as China or Europe will not be meaningful until AT LEAST 2020 and perhaps never.

Tesla May See Significantly Limited Access To Capital Markets

Tesla’s first quarter results were an unmitigated disaster.  The company, which began 2019 with about $4 Billion in cash, burned $2 Billion of it in just 3 months.  Operations accounted for about half of those cash outlays with the remainder required to redeem a $1 Billion convertible debenture.  Automobile sales were WELL below estimates that had already been reduced several times.  “Founder Elon Musk Continues Self Inflicted Damage”. (https://markonomics101.com/2019/04/07/founder-elon-musk-continues-self-inflicted-damage-chart-of-the-day-21/).

It’s apparent that the strong 3rd and 4th quarters of 2018 were artificially boosted by buyers wanting to take advantage of the price subsidies before they ran out.  Tesla generated positive cash flow in the third quarter and investors mistakenly extrapolated the “growth” in demand to mean that earnings were in sight at last.  The disastrous first quarter, however, had Tesla back in capital markets tapping already impatient investors for more money.

In early May, Tesla raised an additional $2.7 Billion in both additional equity and another convertible bond issue.

The company sold 3.1 million shares at $243 per share and $1.6 Billion in new convertible notes.  Musk himself participated in the equity offering with a purchase of about 100,000 shares or $25 million.  While Musk’s own purchase was completely immaterial, relative to his reported net worth of more than $20 Billion, this one “factoid” was made out to be a major selling point of the capital raise.  (https://www.cnbc.com/2019/05/03/tesla-boosts-the-size-of-its-share-offering-and-says-elon-musk-will-now-buy-25-million-in-stock.html).

The successful placement was even made larger on May 3rd and was immediately celebrated with a rally in the stock to $255.  Just 19 days later, however, the stock is down nearly 25% or $60 per share.

Perhaps more important is the price action in the Company’s Bonds.  With the additional $1.6 Billion in convertible debt raised, Tesla now has more than $13 Billion in Debt.  The chart above is for Tesla’s non-convertible Senior Bonds issued two years ago.  The Bonds were initially issued at a yield of 5.3%.  As of this morning, however, these bonds yield 9.2%. (https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/bfmF2CB.jpg).   (https://markets.businessinsider.com/bonds/tesla_incdl-notes_201717-25_regs-bond-2025-usu8810laa18).

The yield of 9.2% puts Tesla only about 2% below the average for CCC rated paper, lowest rating assigned to companies not in default.  This will make any further capital raising EXTREMELY expensive and therefore, problematic.

Musk’s Autonomous Driving Predictions Strain Credulity

Musk, however, continues to make bold and UNREALISTIC forecasts of the Company’s prospects.

At a live-streamed event called “Autonomous Day” in late April, Musk predicted the Company would have a fleet of 1 million “Robo-taxis” sometime in 2020.  His claim was predicated upon proprietary software that is currently included in every car built although not yet activated.  Once the software is turned on, the owner of the car can use a Tesla app to lend their car out for “driverless taxi service”, putting the Company directly into competition with Uber and Lyft.  “Lyft’s IPO Raises Questions”.   (https://markonomics101.com/2019/03/31/lyfts-ipo-raises-questions-chart-of-the-day-20/).

While existing ride-hailing companies charge roughly $2.50 per mile, Musk claims that a Tesla owner would incur a cost of only 18 CENTS per mile.  As a result, according to Musk, a TESLA could effortlessly earn its owner an additional $30,000 per year by shuttling riders around.   (https://www.businessinsider.com/tesla-self-driving-car-event-may-not-impress-wall-street-2019-4).

Musk went on to project that Tesla would soon have a market capitalization of $500 Billion as it dominated the ride-hailing market PROFITABLY.   No drivers necessary, just a fleet of cars.  In addition, he predicted that any Tesla with this autonomous feature would instantly be worth $250,000, presumably because it could generate the owner passive income of $30K annually.   Despite the “enhanced” value claims of Tesla, it continues to have to cut prices to move cars.

Tesla Cuts Car Prices For The Third Time in 2019

Tesla still projects sales of 100,000 cars per quarter for the remainder of 2019.  Yet, just yesterday, the Company CUT prices for the third time this year.  With Federal Electric Vehicle credits scheduled to terminate in just a few weeks, the Company will have to attain competitiveness without help from Uncle Sam.   With sales of roughly 60,000 cars in the first quarter, and subsidies running out, an increase in sales is simply not in the cards.   (https://www.zerohedge.com/news/2019-05-21/tesla-slashes-car-prices-third-time-3-months).

More and more, Tesla appears to be on a non-sustainable financial path.  The capital requirements to achieve any kind of autonomous driving are still considerable EVEN IF the Company’s claim of the viability of its technology is accurate.  UBER’s and LYFT’s extreme losses stem primarily from the buildout of new territories, promotion, and other ancillary aspects of ride-hailing.  Merely having a possible “fleet” is not sufficient.   In addition, and VERY CRITICAL, is that half of Tesla’s vehicle sales are in California.  Even if owners participate in the “Robo-taxi” program, which is also questionable, they will not have nearly the number of cars necessary to service virtually any metropolitan area other than Los Angeles and San Francisco.  Keep in mind, Lyft and UBER already have MILLIONS of drivers nationwide.

Tesla’s Fate

Tesla’s market capitalization is still a not so shabby $35 Billion, placing it third behind Ford and Toyota.   Even Tesla’s biggest critics do not minimize the intangible value of the Company’s technology and data.  Tesla’s are actually more like computers with heavy duty batteries than they are like most autos.  This provides Tesla with valuable data regarding its cars, their performance, and its customer’s habits.

Tesla has assets but it is becoming more clear that its biggest liability is Musk.  That leaves only a few possible paths.  One, is acquisition by another company.  Only Toyota would be in a position to buy the Company today.  It seems more likely that at a lower price, perhaps $100 per share, some suitors would step up for the value of the technology and data.  Musk’s influence on the operations of the Company are certain to be curtailed under any circumstances.

Tesla is still a stock to avoid altogether.  While it’s probably more likely the stock will continue to be under pressure, as will Musk, it is apparent that the Founder is not ready to release the reigns until forced by financial circumstances to do so.  The wild card, and Musk’s greatest hope, is for an extension of the Federal Electric Vehicle credits to boost demand.  However, political forces opposed to subsidizing a multi-Billionaire even further are considerable.

 

 

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