CNBC reported that Morgan Stanley, the venerable investment research and brokerage firm, believes shares could trade back to $10 in a worst-case scenario. The near-term outlook for the maker of electric vehicles has darkened.
It shows how fast things change on the cutting edge of innovation.
Honolulu Hawaii USA – April 2, 2019: Tesla Motors showroom in Waikiki Beach with the Tesla Model S in the foreground. Tesla Motors is a designer and maker of electric autonomous vehicles.
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For what it’s worth, I have never been interested in owning Tesla shares and have never recommended them. They make a great car that customers love, but I have never been able to rationalize all the drama surrounding the company or understand their path to persistent profitability.
Undoubtedly, chief executive Elon Musk is brilliant. Yet the steady parade of executive departures and public war with short-sellers is disconcerting.
At the same time, I have never bought into the argument pushed forward by bears. They have been saying since the successful Tesla IPO that it was only a matter of time before the house of cards Musk built collapsed into a sea of investor despair.
For the record, Tesla first issued shares to the public June 2010 at $17. According to my math, the current price, $190, is far greater than $17. Bears have been wrong about Tesla for almost a decade, but who’s counting?
What’s happening now, and it’s important to put this in perspective, is that Musk put the company in peril by growing too quickly and taking on too much debt — about $13.3 billion worth.
It’s strange, because for a company that was supposed to blaze a new path in vehicle design, manufacturing and marketing, Tesla is mired in the classic automaker’s trap.
The Financial Times started its “Big Read” column in January with a fun fact: In 2007, General Motors was celebrating its 76th anniversary with $25 billion in cash. Only 18 months later, the company was bankrupt.
The point is that making cars is extremely capital-intensive. Factories capable of churning out thousands of cars per week are a license to print money when demand is solid. However, when demand softens, those factories become a liability.
Musk spent most of 2018 frantically trying to get production rates for the Model 3 to 5,000 units per week, only to discover when he finally hit that milestone that demand was waning.
Tesla now has far too much capacity relative to demand.
Morgan Stanley notes that the EV market Tesla started is saturated in every market outside of China. Worse, Tesla loyalists may now be waiting for the Model Y, the new sport utility crossover vehicle Musk revealed in March. Realistically, the newer model probably won’t deliver until spring 2021.
In fairness, not all the weaker demand was foreseeable. The U.S. government cut financial incentives to buy electric vehicles, then made it harder for American companies to do business in China, the biggest market for EVs in the world.
And media outlets have consistently sensationalized every Tesla driver fatality. The company does not claim its vehicles are self-driving. Drivers are specifically warned that they are driving the car and should always stay alert. Every fatality in a Tesla to date has been caused by driver error, but readers would never know this based on headlines.
FILE – In this March 2, 2019 file photo, Elon Musk, CEO of SpaceX, speaks during a news conference after the SpaceX Falcon 9 Demo-1 launch at the Kennedy Space Center in Cape Canaveral, Fla. Tesla plans to cut its board of directors from 11 to seven in a move the car maker says will allow the board to act more nimbly and efficiently. Tesla says the four directors who will depart aren’t leaving because of any disagreement with the company. Tesla disclosed the changes in regulatory filings Friday, April 19, 2019. (AP Photo/John Raoux)
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Teslas are consistently shown to be the safest vehicles on the road.
All these factors are contributing to weaker demand. And weaker demand, for an automaker, is a very bad thing.
Meanwhile, Musk is unfocused. When he’s not talking about colonizing Mars, he’s off burrowing tunnels under Los Angeles. Tesla needs a leader focused on its survival, not his legacy.
There is some good news. Tesla’s intellectual property is valuable. Its cars have been collecting data and whisking that information back to data centers for analytics for years. That information helps train the artificial intelligence models that will one day bring true autonomous navigation.
As the shares swoon, old stories about Apple trying to buy Tesla for $240 in 2013 have begun to surface. While it’s hard to imagine Apple buying Tesla now, the company could be an acquisition target for another company within the auto sector, probably at a much lower valuation.
Shares trade at 32x forward earnings, but that assumes demand remains relatively stable. The problem for Tesla shareholders is that its CEO is often distracted by other projects, and investors are starting to talk about viability. That’s not a confidence-builder for potential Tesla vehicle buyers.
The bottom line is Tesla shares are still too expensive and too risky for most investors because there is too much distraction at the top. Tesla shareholders need a focused leader.
