Over the next few months, we could see huge losses in one of the world’s most popular companies: Tesla Motors Inc (NASDAQ:TSLA).
No, it won’t happen overnight. But as I’ll show you today, the current share price of TSLA stock will likely not stay as high as it is right now. A big drop could be coming. And before the plunge is over, we could see Tesla’s stock price drop 50% or more. Let me explain.
The No. 1 Reason to Be Bearish on Tesla Stock
During every boom, a handful of “story stocks” go ballistic. Central banks set interest rates too low. The flood of cheap money is rushed through the system. Investors searching for returns bid up the price for the hot idea of the day. In the 1960s, it was the “Nifty Fifty”. In the 1990s, it was Internet stocks. In the early 2000s, homebuilding stocks and the housing industry in general exploded.
The story continues as long as money remains cheap and there’s a steady supply of new investors to prop up shares. Eventually though, the cheap financing dries up. And unless there’s a solid business behind the security, shareholders get burned.
Tesla stock could be a similar story. For the past few years, zero-percent interest rates have propped this stock up. But like the “story stock” booms of the past, investors could be in for a world of hurt when the Fed’s easy-money policies dry up. The problem with Tesla stock: the company is a cash-burning machine.
Over the past six quarters, Tesla’s core business has burned through more than $3.0 billion in cash. No surprise here. Making automobiles is a low-return, capital-hogging business. And as the company ramps up production of its new “Model 3,” Tesla’s cash burn is only expected to intensify over the coming years.
The SolarCity Corp (NASDAQ:SCTY) acquisition could put more pressure on Tesla’s balance sheet. Barclays PLC (ADR) (NYSE:BCS) forecasts that the solar energy company will burn through $1.8 billion of free cash flow in 2016. The combined companies could face a $3.4 billion funding shortfall in 2018, before factoring in the financial impact of the merger. The cash shortfall at SolarCity is so bad that Elon Musk has even floated the idea of a bridge loan to the company before the deal closes, if needed. (Source: “Tesla: Incessant Cash Burn and Looming Competition Isn’t a Trillion-Dollar Formula,” The Wall Street Journal, June 22, 2016.)
Tesla has been able to issue equity and convertible debt to finance itself so far. More equity issues will be coming if the SolarCity deal closes. But if Barclays’s numbers are correct, the coming years won’t be any different.
This shareholder dilution hasn’t hurt TSLA stock… yet. In an easy-money boom, “story stocks” can continue to raise funds unabated. And, as we have seen in previous busts, companies dependent on capital markets, like Tesla, can implode quickly when the hot capital dries up.
There are other cracks in the TSLA stock story, too. Today the company is valued at almost $30.0 billion, as if there’s already a Tesla parked in everyone’s driveway. However, even assuming that Musk hits his targets, the automaker is only expected to deliver 90,000 vehicles next year.
By comparison, consider Fiat Chrysler Automobiles NV (NYSE:FCAU). Right now, this regular old automaker is valued at just $8.2 billion. Yet Fiat produced more than 4.6 million vehicles last year.
And rivals are starting to encroach on Tesla’s turf. General Motors Company (NYSE:GM) is rolling out its new “Chevy Bolt,” which promises to have more range than the Model 3 at a lower price. Analysts are also impressed with the BMW (Bayerische Motoren Werke AG (FRA:BMW)) “i3.”
With a big price tag and growing competition, how many more times will Tesla be able to access capital markets? Sure, the game of musical chairs can keep going as long as Janet Yellen keeps the easy money flowing. But given the recent drop in Tesla’s share price, it looks like investors are starting to clue in.
Is It Time to Dump Tesla Stock?
I’m not the only one worried about Tesla stock; billionaire Jim Chanos has been building up his short position in the automaker. In an interview this week, he ridiculed the company’s recent acquisition of SolarCity, calling the deal “puzzling” and “the height of folly.” (Source: “JIM CHANOS: Tesla is putting itself ‘under the red line’,” Business Insider, September 13, 2016.)
And he’s not the only one. In recent months, a number of firms—including UBS AG, Citron Research, and Devonshire Research Group, LLC—have all issued dire warnings for investors. Cowen and Company (Cowen Group Inc (NASDAQ:COWN)) analyst Jeffrey Osborne initiated coverage on Tesla, starting with an initial “underperform” rating and a bearish $160.00 target price. (Source: “There’s a new Tesla bear on Wall Street,”Business Insider, September 8, 2016.)
What could have all of these smart money managers so worried? I’d say it could mean only one thing. They see a lot more downside for a “story name” like Tesla stock.