Tesla FUD Series Meta Post: A Case For My Caution Regarding #TSLA

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The goal of this series is to examine current topics being written about Tesla [TSLA] that appear to be stirring up “Fear, Uncertainty, and Doubt” (or FUD). The plan is to try to provide reasonable analysis about the validity of the claims. I generally do not link to the articles that “inspire” me to write this, as I do not wish to reward analysis I feel is poor with increased traffic. However, I will freely admit that my analysis may contain incorrect assumptions, and will do my best to acknowledge them in future articles.

It’s been a bit of time since my last FUD article. When I wrote it, on March 11, a share of TSLA stock was worth $290.92 at close. Yesterday, Tesla closed at $210.34, or 72.3% of the value of my last article. I guess the good news if you are a shareholder is that it is up from June 3rd (when it closed at $178.97) by over 17%, which I suppose is great if you bought the stock at that exact moment.

I do realize that since March 11, a ton of news has happened in the world of Tesla, and I found that every time that I sat down to start trying to gather data to write an article, some new piece of news would break and everyone’s attention would go there. With more negative than positive news lately, and also a super busy time in my personal life, it’s been hard to keep up.

Instead of dispelling any of that today, however, I’m going to answer a question I often see after my FUD articles that springs from the boilerplate text I tweak before going into my analysis, and I guess that boilerplate is a good place to start:

I remain a Tesla shareholder with 8 shares, with no intention to add to or sell that stake. I’ve mentioned in the past I think Tesla remains a risky stock, but one that I still believe has the potential to increase astronomically in the future, which is why I continue to hold a limited number of shares. I would not suggest anyone use the following article as their sole data point to decide to invest nor sell shares in Tesla.

A Risky Stock?

I have purposely avoided explaining why I thought that Tesla was a risky stock because I worry that when a site like CleanTechnica says anything negative about Tesla, both the mainstream media and writers on sites like Seeking Alpha generally use that to demonstrate how “sentiment is shifting on Tesla!” — and I don’t want to have my words piled into the fray.

But, with all the issues over the past three months, I feel like I can actually address this. I do believe that Tesla is a risky stock, but not due to any of the issues that we have seen in the past three months. Here are some bullet points of what happened, and my super quick takes on them:

• Q1 Performance — Yes, Tesla lost $702 million. It also had 10,600 vehicles in transit at the end of the quarter. At the end of Q4, it had 1,897 vehicles in transit. If Tesla instead had 1,900 cars in transit and had delivered the other 8,700 vehicles at an average cost of $40,000, that alone would account for nearly half of the loss for the quarter. And, while a $354 million loss is bad, it’s significantly different than a $702 million loss.
• Q1 Demand — Demand in the US dropped in Q1 compared to Q4 of last year and Tesla “had to” drop the price of the car by $2,000 almost immediately, yet still didn’t sell the same number of cars. To quote myself when I addressed this on January 5th, duh? Tesla needed to address the tax credit phaseout, and opening ordering in other markets was a good way to do so.
• Vehicle Price Changes — Tesla is known for not supporting model year upgrades and for continual improvements. The price changes seem dramatic because Tesla publishes the prices on its website, unlike dealers, where you need to show up or get a phone call to find out what the current rebates are. (This is an interesting negative to the direct sales approach that I hadn’t realized before.)
• Leaked Email Regarding “Hardcore” Cost Cutting — Someone leaked a “rally the troops” style email to ensure that Tesla was using its capital right. The media seized on his description of the capital Tesla raised only giving the company an extra 10 months if it burned cash at the same rate as Q1. This was an oversimplification of the email, and Tesla is not in danger of going bankrupt in 10 months. For one, it had cash on hand before the raise. Even in a worst case scenario, it would take 20 months of Q1 burn rates for Tesla to reach bankruptcy.
• Cash Raise — Speaking of the cash raise, Tesla raising $2.7 billion last month was looked at as a negative thing by a lot of the media, the same media that shortly before was saying that not raising the money was silly. The fact that Tesla raised more than it wanted, immediately, seems like a big positive to me.
• Lack of Model S and X Demand — These sales dipped a lot. Maybe they were trying to clear out inventory before the introduction of a new powertrain that makes the cars significantly more efficient and provides a longer range? Maybe it was because the value proposition of the Model 3 makes the differences between an S and a 3 tilt the scales toward selling more Model 3s? Whatever it was, I’m not overly concerned about this or Tesla’s price changes. The more mass market Tesla gets, the more it will need to differentiate its trim levels to show why the difference in price is worth it.

Okay, that was five major things, and none of those do anything to explain why I said that Tesla is a “risky stock,” so let’s get to that now. I think that Tesla is a risky stock for two reasons:

Reason 1: Unlike Any Other Company

Ultimately, I feel like the reason that Tesla has had so much turbulence in its stock price in the past few months is attributable to this more than any of the above items. When stock analysts look at Tesla, are they looking at a luxury automaker? A regular automaker? An energy company? A technology company? An autonomy company?

Putting it simply, the industry doesn’t have any other rapidly growing, vertically-integrated automobile companies that also provide grid-based battery backup and residential solar solutions, while also attempting to develop an autonomous robotaxi fleet. Oh yeah, and the company has a proprietary, worldwide automobile fueling network.

How does a person value that? Honestly, I have no idea. And, quite frankly, I don’t think that anyone really does.

For the most part, the professional stock analysts who cover Tesla tend to be auto industry analysts, and if you just analyze Tesla as an auto manufacturer, it is wildly overvalued. Additionally, if you break down Tesla’s cars in the simple way that analysts often do — “just put an electric motor and batteries in any car and anyone can churn these out” — you overlook so much that the company is trying to do.

Finally, adding to the volatility, while it isn’t the majority, a not-insignificant number of people who own Tesla stock are individual investors. When people own stock directly, emotions can directly impact their decision to hang onto the stock, leading to larger swings and more volatility.

So, we have a unique company that exists within multiple completely different industries, with stock held by a number of potentially emotion-driven investors. That’s a recipe for extreme volatility until the company can show a few years of stable operations and profits … which brings me to my second reason Tesla is a risky stock.

Reason 2: Wildly Ambitious Company

Tesla is extremely ambitious. Its mission statement is to accelerate the world’s transition to sustainable energy. To do that, Elon Musk created and published a “master plan” in 2006 that stated that they wanted to build electric cars, starting with a sports car and using the money made there to make a more affordable car, and using that money to create an even more affordable car, all the while finding a way to provide zero-emission power generation options.

In 2016, Elon updated the company mission to include solar power more explicitly, residential battery backup, expanding Tesla’s vehicle lineup to include all segments (including heavy-duty trucks), developing autonomy systems for those vehicles, and allowing owners to use those cars as robotaxis.

That’s a ton of different goals, and to get there, Tesla sometimes feels like it is going in a million directions at once. Right now, it has already unveiled three new vehicle designs (Model Y, Roadster, and Semi) that the company is hoping to bring to production within a year or so, and Tesla expects to reveal another at the end of summer (the Pickup). It is also pushing to expand its solar roof business, creating a Chinese Gigafactory, looking to find a place for a European Gigafactory, integrating whatever new tech it wants from Maxwell, starting its own insurance company, and more.

Oh, and it is rapidly building out its proprietary charging network while continuing to update both its own custom autonomous hardware, improve its internal software, and expand its service network.

With all of this going on, it’s not a wonder to me why Tesla sometimes loses money in a quarter.

And back to that mission statement: the other thing that Tesla does that no other company seems to do is it announces its products practically as early as it can. The Model S, X, and 3 all spent at least a year between announcement of the car and showing it. I believe that Tesla does this specifically to push other automakers into the segment once Tesla proves that there is a market for it, thus attempting to accelerate the world’s transition to sustainable energy by getting other companies to do more, and also giving Tesla itsef less exclusivity.

This ambition is the thing that I think is risky about the company — if Tesla could do something in the next 6 months to ensure that the world switched to 100% electric cars in the next 5 years, even though it would go out of business doing that, I have no doubt that Tesla (via Elon) would do it. This is a company that takes risks due to its mission statement, and the more success it has, the more risks it seems willing to take.

According to the financial reports from Q1, Tesla reported automotive gross margins above 20%. If we assume that all 63,000 deliveries it achieved sold at an average cost of $40,000, that would means that Tesla earned $504 million in profits from the sales of its vehicles.

That money instead is being used to further its mission, and develop new products and create new technologies that do just that. Tesla isn’t stopping to take a breath and get its feet under it — the company is pressing on.

And, while this is an article for a future point in time, it’s working. Automakers are introducing and promoting their EV lineups. Solar is taking over the grid. Battery prices are falling.

This isn’t all due to Tesla, of course, but without Tesla, I am certain we wouldn’t see much improvement, if any, in the EV and battery sectors.

In Conclusion

Tesla is risky because there are so many unknowns with what it will do, and how the market and competition will react, and how emotionally investors will react to it all. I knew all of this when I invested in Tesla, and I remain hopeful that explosive growth will continue to follow the company as it has over the past few years.