Tesla Stock Needs a Correction
What else is new? Tesla Motors Inc (NASDAQ:TSLA) was trading only 0.5% lower yesterday morning, but it definitely could’ve been worse. After all, the American manufacturer of luxury electric cars continued to show losses in its second-quarter results. It also produced fewer vehicles than expected.
Tesla’s CEO, Elon Musk—who runs the car company, a solar panel company, and a space exploration company planning a mission to Mars by 2025—must be running on Tesla stock’s famous “Autopilot.” You would think that the chronic production problems with the “Model S” and “Model X”—not to mention the “Model 3”—would be a sufficiently engaging hobby, but no such worry. Tesla stock has a Teflon-like shield, provided by fawning investors (or rather, worshippers).
According to earnings results released Wednesday, Tesla reported a net loss of $293.2 million, or 59% higher than the $184.2 million net loss in the same period last year. Well, at least it wasn’t a $300-million loss! Let’s all buy some more Tesla stock before heading out to the electric car fest, singing “Kumbaya Elon.”
The Numbers Speak for Themselves
To the credit of TSLA stock, revenue of $1.27 billion marked a 33% increase. However, adjusted revenue of $1.56 billion was below market expectations of $1.62 billion. Here’s the truly mindboggling number, though: Tesla reported an adjusted loss per share of $1.06. This was more than double what analysts expected (a $0.52 loss). This was also the 13th straight quarterly loss for Tesla, for those who keep track of such things. (Source: “Tesla posts another loss, but says on track for future deliveries,” Reuters, August 3, 2016.)
But—and there’s always a “but, wait” when the topic of Tesla’s production comes up in polite conversation—Tesla says it can increase production tenfold in the next three years. (Source: Ibid.)
Indeed, that’s certainly possible, but is it probable? Nope; it’s unlikely, given that operating expenses are increasing and suppliers are failing to meet delivery schedules. (Source: Ibid.)
Tesla said it had delivered 14,402 cars in the quarter under review. By international arithmetic standards, that’s definitely less than the 17,000 Elon Musk had promised. (Source: Ibid.)
However, TSLA stockholders follow a new and greener mathematical standard. A normal car company posting 13 straight losses in a row wouldn’t be trading at some 30 times its book value. In fact, it wouldn’t be trading at all; it would be out of business.
Sooner or later, TSLA stock is going to implode. The darling of the “Church of Our Lady of the Environment” continues to spend more than it earns with no viable plan for becoming profitable. It seems Elon Musk’s other hobby is alchemy and he might be up for a Nobel in that dubious pursuit. The problem is that as long as governments are willing to subsidize so-called “green” companies, Tesla will continue to exist. (I say “so-called green” because there are plenty more toxic materials in a Tesla than a regular car. Ever wondered what goes into extracting and processing the rare earths needed to make its components? If you had, you’d know Tesla isn’t green.)
What Allows Tesla Stock To “Get Away” With It?
At any rate, investors are probably hoping governments will continue to use more taxpayer money through carbon taxes—or increase the current ones—to ensure companies like Tesla don’t crash. Some wiser people must be wondering, how long can Tesla keep this up—Tesla, which has never reached a profit since its inception in 2003?
Well, Tesla Motors has just formally added another royal loss-maker, SolarCity Corp (NASDAQ:SCTY), to its books on August 1 for $2.6 billion.
The group, which intends to market the end of 2017 “Model 3” as an electric car for the general public and for which Musk has already received more than 300,000 pre-orders, also built a gigantic $5.0-billion battery plant in Nevada called the “Gigafactory.” That facility is massive, but it’s still far from operational. By the time it’s finished, it might produce something nobody wants. (Rather than a Gigafactory, it might be a Giga-dodo!)
Battery technology is advancing rapidly and there’s no guarantee that lithium-ion (Li-ion) batteries will endure the test of time. There’s a good chance that, as many manufacturers start introducing electric cars, battery technology will evolve. For the record, Tesla didn’t invent electric cars. They’ve been around longer than internal combustion cars. Breakthroughs with aluminum-air (Al-air) batteries could blow Li-ion batteries out of the Nevada desert. (Source: “New aluminum air battery could blow past lithium-ion, runs on water,” Extremetech, January 28, 2015.)
There is no question that the future will see more and more electric cars. In order to make them viable, however, battery technology has to evolve. If not Al-air batteries, someone else will come up with a better battery and Tesla’s gigantic Li-ion facility would become the Betamax to someone else’s VHS.
The Problem Is Not the Electric Car; It’s Tesla’s Valuation
Ultimately, though, the problem is not with electric cars at all. There’s nothing wrong with electric cars. Many car companies are introducing them and that’s actually the problem for Tesla. The established manufacturers, those that have confronted production issues when Elon Musk was in diapers, will make them more efficiently. They’re just not getting the cult-like shareholders that are flocking to Elon Musk’s company. Tesla has constantly failed to ramp up production, while it still enjoys a relative monopoly in the luxury electric car market, all because of Musk’s fan boys.
Soon, Musk’s company will come up against competition from Mercedes-Benz, BMW, Lexus, Fiat Chrysler, Kia, Hyundai, General Motors—and the list goes on. What rabbit will Musk pull out of his alchemy kit to save Tesla shareholders then? He doesn’t care, he’s rich and he has plans to go to Mars. Tesla shareholders might be left picking up the bill.
The point about TSLA stock is that it’s simply too expensive. Tesla Motors certainly has earned its place in the automotive world. It makes attractive cars that many people covet and buy. Nobody is disputing that.
The problem is with its lofty shares, which trade so high they break the law—the law of gravity that is. Elon Musk is a physicist by training. He should be advising his shareholders on the story of Isaac Newton and his Philosophiae Naturalis Principia Mathematica. All that goes up, must come down. Despite, what the “Religion of Tesla” preaches, Tesla shares are hovering too close to the sun and the company’s wings could soon melt and crash.