Tesla Stock and Elon Musk Are All Show No Substance
Elon Musk has a bright future in politics or headlining a Las Vegas show because he can mesmerize an audience like few others, professional entertainers included. He creates the suspense of disbelief that is at the heart of showmanship, as reflected in the latest quarter for Tesla Motors, Inc. (NASDAQ:TSLA). For this reason, my Tesla stock outlook is bearish in 2016.
Tesla lowered its delivery expectations in order to emphasize the production numbers, noted Efraim Levy, Senior Equity Analyst at Standard & Poor’s. (Source: “Tesla Motors Inc. (TSLA) 3Q 2015 Earnings: Tesla Shares Spiked after Model X Maker Reported Record Quarterly Vehicle Production,” IBTimes, Nov. 3, 2015.) Efraim added that Tesla is continuing to lose money, yet Tesla Motors stock managed to go up slightly.
Tesla just announced another quarter of negative cash flows, this time to the tune of a $596 million loss. Meanwhile, Elon Musk has sourced a new CFO from Google, Jason Wheeler. (Source: Katie Fehrenbacher, “Tesla hires its New Finance Chief from Google,” Fortune, Nov. 3, 2015.) The latest move provides a sound bite to eager fans, predicting that non-driverless cars will be the equivalent of the horse in the current world. A few weeks ago, Musk criticized Apple Inc. (NASDAQ:AAPL) for hiring the people his company dismisses. So is Musk now hiring Google’s rejects instead?
TSLA Stock Outlook 2016: Good, But Only If You’re Crazy
It is a mystery how Tesla Motors can win so many fans while not as many customers. The fans seem to think that Tesla owners drive free of charge. That might be because Tesla must maintain supercharging stations at a considerable expense; probably over $100 million for just 150,000 cars on the road. (Source: “Questions Musk Needs to Answer about the Tesla Superchargers,” Market Mad House, Dec. 10, 2014.) That raises the question that Tesla investors and enthusiasts aren’t answering: how long can it possibly continue to do this? The short answer is that it cannot.
Chart courtesy of www.StockCharts.com
Tesla Motors is a luxury carmaker. As it happens, a maker of electric luxury cars. Tesla and its founder Elon Musk, unlike its proponents like to imply, are not saving anybody’s planet. The Tesla Model S is an electric supercar designed for an elite public; the Model X, when deliveries begin, will be an SUV for an elite public, which somehow becomes more acceptable because of its ecological (or rather, allegedly ecological) characteristics.
If this is a question of image, Tesla Motors stockholders should be more concerned by the fact that the company has not made a single profit yet, yet share prices have reached ridiculous valuations. Now just barely corrected, Tesla Motors’ valuation rivaled none other than Apple.
Tesla Motors has not yet failed. Perhaps this is because one of its majority shareholders is the infamous bank Goldman Sachs, which got involved in the company in 2009. (Claudia Assis, “Elon Musk’s secret? Taxpayer money, L.A. Times says,” Marketwatch, June 1, 2015.)
This injection of money does not correspond to any real gain, yet Wall Street continues to suggest that Tesla is worth 12 times more than it actually is. All because it produces a car powered by a 100-year-old technology that has been passed off as innovative because some guy–not even Elon Musk–said so.
The Tesla Stock Bubble Continues
The fact is, many Tesla stockholders have inflated the Tesla bubble just because it produces electric cars, not because it produces so many; perhaps because it was thought that oil prices would remain forever at $115.00 a barrel. Nevertheless, the real illusion is to think that crude oil scarcity or high prices would be sufficient in creating a mass market for electric vehicles, especially considering that oil and coal are still the main resources used to produce electricity.
Even assuming that battery-powered electric vehicles would take hold, Tesla stockholders would be off the mark because Tesla cannot become the automotive market leader that its valuation implies. Just like Volkswagen AG (OTC:VLKAY), to achieve that target, Tesla Motors must beat Toyota, once again becoming the biggest car manufacturer in the world, regaining that spot from Volkswagen in the wake of “Dieselgate.” Tesla would need to make revenues of $50.0 billion with profitability equal to Toyota in order to justify its valuation. From 2007, Tesla sales have been about $6.1 billion, the amount Toyota sells in a week.
Simply put, a few rich people, made to feel guilty about the environment, take home a Tesla Roadster or a Model S, subsidized by working class American taxpayers. Notwithstanding is the problem that Tesla can tap into subsidies for zero-emission vehicles (ZEV), invented by Al Gore to show that trees are his friends.
Indeed, Tesla has used attractive styling and high performance to make electric cars sexy and desirable, proving that electric cars are not condemned to be ugly, small, city cars. By assembling lithium-ion cells of small dimensions (such as those used in laptops), the founding engineers of the Tesla startup–joined a year later by Elon Musk–succeeded in developing a battery with sufficient power to move a sedan chassis at high speed.
Elon Musk sees further. Tesla Motors’ Gigafactory could become the largest lithium-ion battery manufacturer in the world with input from Panasonic, which currently supplies the California-based automaker. In reality, Musk has made batteries as the centerpiece of his future ecosystem. In late April, he caused a sensation by announcing the launch of energy storage solutions for individuals and businesses.
Coupled with solar panels, these could “feed the world with electricity.” For investors, the bet is even more relevant that the contractor already has one foot in solar energy with SolarCity Corporation (NASDAQ:SCTY), a clean energy company he chairs. The experts seem skeptical. The market for domestic batteries seems like a big bet; the batteries are still very expensive (the Tesla Powerwall starts at $3,000). Other options are already at the forefront in this market. Panasonic, LG, Samsung, and Saft in France are already developing similar solutions.
To achieve profitability, Tesla needs to sell 500,000 vehicles in 2020. Market observers are also skeptical. This year, Elon Musk admitted that he could hold his annual goal of 55,000 vehicles, finally resulting in a drop of its share price.
“It is impossible; especially when we know that the Renault-Nissan alliance sells three times more electric cars than Tesla,” said Christophe Pillot, head of battery tech specialist Avicenna Energy. (Source: “Pourquoi un tel engouement pour Tesla?” Le Vif, Oct. 18, 2015.) Moreover, high-end manufacturers such as BMW, Mercedes, and Audi are all ready to launch their own electric cars (also having hydrogen cell ones in the background as a backup strategy in case the battery falls victim to the fuel cell). Tesla Motors stockholders should be worried that Teslamania could deflate.
If Batteries Are Tesla Motors’ Future, Why Are They Doing This?
On the one hand, Musk and Tesla Motors create a lot of dissension between the mullahs of innovation fascinated by the success story. On the other hand are the traditional business actors focused on income statements. Musk thinks that the batteries are the future of the planet and that Tesla Motors can work as long as investors follow him. However, the problem is more complex and investors should watch out for Tesla Motors and the artificially induced “Green Revolution” premised on what Musk repeatedly says he wants to do: save the planet.
Returning to the topic of batteries, LG Chem, the South Korean giant that produces batteries for Audi’s electric SUV and the Chevrolet Bolt, was awarded the contract to update the Tesla Roadster’s battery. This battery is available at the “modest” sum of $29,000. The Wall Street Journal noted the oddity: the Model S and Model X use Panasonic (LG Chem’s competitor) batteries based on a supply agreement dating back to 2013. In addition, Panasonic is Tesla Motors’ partner in the Gigafactory to make mass market lithium-ion batteries for cars as well as home use. (Source: Mike Ramsey, “Tesla Gets Boost From Korean Battery Maker LG Chem,” Wall Street Journal, Oct. 28, 2015.)
LG Chem has already worked with General Motors on the battery of the Chevrolet Volt and is now working on the Bolt, a mid-priced electric car with an over 200-mile range to be launched in 2017. Ford and Nissan-Renault alliance are also interested in LG Chem’s technology.
The battle of the battery is spreading. And while Tesla Motors’ Gigafactory has gathered most of the attention, LG and Samsung SDI, AESC (Automotive Energy Supply Corporation, a joint venture between Nissan and NEC), China’s BYD, Mitsubishi’s GS-Yuasa and Wanxiang are all major participants. It may be interesting to discover that the top three manufacturers of electric car batteries are Panasonic, AESC, and LG Chem.
Here’s the Bottom Line on Tesla Stock in 2016
While Panasonic sells largely to Tesla and AESC is a joint venture, where 50% is owned by Nissan, LG sells most of its cells to automakers. LG Chem has experience in chemical and materials science while Panasonic and NEC (Nissan’s partner) have experience in consumer electronics.
LG Chem’s decades of experience research, formulation, and development of chemical products gives it the ideal background to make constant progress in the field of battery chemistry, still the core problem that batteries must address. Therefore, if you like battery-supplied electric power, there are more interesting investments to consider than Tesla stock in 2016.