Tesla: Running out of juice?

Tesla is one of the most polarizing companies on Wall Street, riling up both hardcore believers and convinced sceptics ever since it went public in 2010. The company is used to being in the news, with its high-profile leader Elon Musk keeping journalists (and investors) busy with his unconventional leadership style while amassing an almost religious following in the process. Though early investors in the company can still rejoice in a tenfold increase in its share price since its IPO, this year is shaping up to be one for the short sellers. Shares are down 40% so far this year, having lost a fifth of their value from one week in May alone as Tesla became the worst rated stock on the NASDAQ 100.  The reasons for this vary –a second report that its autopilot system was involved in a fatal accident is not the only trouble facing the electric carmaker. As competition grows, production problems continue, and the US-China trade war shows no signs of stopping, more investors are beginning to cast doubts on whether Tesla can keep to its ambitious promises.

Investors were very disappointed by Tesla’s first quarter earnings report for 2019 as the company could not keep up its streak of two consecutive quarters of profitability. Instead, a net loss of $667 mln on revenues of $4.5bln were reported, down from a net income of $210mln on $7.2bln of sales reported in the previous quarter. This rattled many investors, sending the stock down almost as far as its two-year low as of this writing. While this has avenged short sellers on the one hand (“I told you so!”), it has also put Musk under much criticism. Last year, the CEO did not take advantage of its high valuation to raise capital through issuing new shares, instead declaring the company “financially sustainable”. Just one quarterly report later, he quickly abandoned his charismatic conviction as Tesla raised $2.3 bln from the issuance of shares and convertible debt in May 2019 –generating considerably less than it would have had it done so the previous year. However, this capital injection not only served as bad signalling to investors but also hardly solves Tesla’s problems. If the company continues its ludicrous rate of cash burn, it is reported to have just 10 months to achieve break-even before running out of money. Tesla finds itself in an uncomfortable position, forcing itself to reduce costs and boost production in the hope of convincing investors it will return to profitability in the foreseeable future.

A major source of headache for the electric carmaker is growing competition from its European competitors. Mercedes, Jaguar, and Audi are all launching their own fully electric cars to rival those of Tesla. Its battle against these more established players is not made any easier by the persistent production problems with its new Model 3 range. Introduced as a more affordable alternative to its S and X models, the Model 3 was supposed to make the Tesla a car for the masses rather than a luxurious gadget reserved for the wealthy few. These problems plagued the company since it began producing the car in 2017, giving it much negative publicity as deliveries continuously fell short of Musk’s ambitious targets. The same appears to be happening this year, with investors doubting whether it will reach its 2019 target of 360,000-400,000 cars amid increased investment in electric technology from its competitors. Another worry is growing tensions between the U.S. and China –tariffs imposed upon cars imported into China are the last thing the American carmaker needs. As with all carmakers, China forms an important market although demand in the country has already been slowing down amid slackening economic growth. However, many investors are convinced that Tesla will be exempt from such tariffs once its Shanghai plant becomes fully operational, though others believe it will still need to import some cars into China when the plant is finished.

Love it or hate it, Tesla is an impressive company that will go down in automotive history as the catalyst behind the industry’s shift to electric vehicles. However, one could argue its fame is built more upon promises than actual deliveries. Investors propped up its valuation to levels above the 100-year old Ford Motor Company despite producing only a fraction of its output. Through marketing itself as more of a technology company than an auto manufacturer, Tesla has been criticized of distracting investors through innovating exciting and promising concepts rather than producing actual cars. For instance, it timed the introduction of the so-called Robotaxi concept (an autonomous network of Tesla cars driving as taxis) shortly after it revealed its disappointing first quarter 2019 results. Whether the recent stock performance will prove to be a temporary reality-check or the beginning of a longer downwards trend remains unknown. But one thing is certain; Tesla remains a company to keep an eye on!

 

Written by: Jasper Thouin