Thoughts on the Tesla Saga

August 17, 2018

 

I've been pessimistic about Tesla for awhile now. I am not alone in that view - the stock has a very high short percentage of float. Everyone has their own reasons as to why they love or hate this company, and there doesn't seem to be a lot of people who are truly ambivalent. That being said, I have no position on the stock. Let me address my problems with Tesla, and why I believe the company will struggle to survive long-term:

 

1. Electric Cars

The number one reason why I'm pessimistic about Tesla is because I am pessimistic about electric cars (EVs from here on) in general. The only reason EVs exist at all today is because of government subsidies, because EVs supposedly are more environmentally friendly than internal combustion engines. If those subsidies are ever cut or eliminated, the future of EVs and of Tesla are in serious jeopardy as they constitute a significant chunk of Tesla's top line revenue.

 

The other problem with EVs is that the infrastructure supporting gas/diesel vehicles is obviously well-established. It's easy to get anywhere in a normal car because there are gas stations everywhere. If you're trying to go out of town in your EV, you must carefully plan your route to find EV charging stations, if there even are any. That is not appealing to the majority of drivers. Recharging stations could be built by third parties in more places but the EV market is so small that it's not worth it. Tesla would have to front the bill for that as well, which just isn't economically viable.

 

 

2. Cost

Teslas are driven by the wealthy. They are the play-thing of the wealthy, shown off at the country club as a conversation starter. These are not the "commuter cars" for the common man, and while I understand the decision NOT to make Tesla cars into boring snooze-cruisers, that decision has the consequence of making the cars expensive. Not enough time has passed since the first Model S was completed to know what resale values or even overall longevity of these cars will be, but if the lithium-ion batteries in Teslas are comparable to the lithium-ion batteries in smartphones, that would be a significant blow to longevity and resale value. Smartphone batteries are notorious for losing power in a short span of time.

 

 

3. Competition

If EVs really are the industry disruption that proponents claim them to be, I don't think the world's automakers will stand idly by and let Tesla control market share forever. Right now, EVs have large margins, but if competition were to increase, those margins would thin and then the larger automakers with economies of scale would control market share, just as they do now with conventional vehicles. The conventional car market is insanely competitive and Tesla simply will not enjoy its market share or margins in perpetuity.

 

 

4. Valuation

These 3 items combine to create a problem with Tesla's valuation. While I agree with the conventions of valuing a company favorably while the company is growing, there's a limit, you know? Tesla is as valuable as Ford and General Motors. Combined. That is a bit high, don't you think? Ford and General Motors are some of the highest volume automakers in the world, selling MILLIONS of vehicles annually, while Tesla is as valuable as the both of them selling less than 100,000.

 

 

5. Macroeconomics

Tesla is ramping up production of 4-door sedans just as the world's automakers are shutting down production of 4-door sedans due to low demand. Consider also that we are currently pretty late-cycle in terms of the business cycle, in other words, a recession is likely not far off. Does Tesla have the capital reserves to make it through a recession, which are infamous for wreaking havoc on already established automakers with considerably less debt and more capital? No.

 

 

6. Musk

This stock attracts a lot of attention because of the antics of Elon Musk. In the past, it seems like most people took it in jest. Now though, with the recent "funding secured" debacle and SEC investigation, Elon Musk could be on is way out. Musk has been the leader of the company since its founding or very near its founding at least, and the majority of the rise in stock price and valuation has come from his promises, charisma, and ability to convince investors that his seemingly pie-in-the-sky goals are actually attainable. I give the man a lot of credit for essentially single-handedly creating today's EV market, but it seems that his shenanigans will not be tolerated by Tesla's board for much longer. Hell, maybe even Musk himself won't be able to handle it much longer. If the visionary leader is ousted from this company I expect the skid in the stock price to be monumental.

Please reload

Featured Posts

Trade Ideas | 3/13/19

March 13, 2019

1/1
Please reload

Recent Posts

March 13, 2019

February 20, 2019

February 11, 2019

January 24, 2019

November 27, 2018

November 8, 2018

Please reload

Archive
Please reload

Search By Tags