Elon Musk launched a Tesla electric sport car into space in February aboard the Falcon Heavy rocket. Tesla also reported fourth quarter earnings that narrowly beat analysts’ estimates. From $2.284 billion last year, the company’s revenue grew to $3.288 million. These events are a testament to Tesla’s incredible potential and sheer courage. These headline-grabbing events do not change the fact that Tesla is losing red ink. The company lost $1.9 billion in 2017, and these losses will only increase in 2018. During the earnings conference call, company officials attempted to downplay expectations for 2018. They cited battery supply constraints as well as production delays at their state-of-the art Gigafactory. The Tesla Gigafactory is still in partial construction and is located near Clark, Nevada, which lies in northern Storey County. It is approximately 17 miles east from Reno. The facility’s construction is expected to be complete by 2020.
David Trainer, CEO of New Constructs Equity Research, says that Tesla has been plagued with production problems since its inception, right from its first car, The Roadster, to the current Model 3. The Roadster used an AC motor that Nikola Tesla had originally created in 1882. Trainer also stated in a recent article, that Model 3 production issues led to delays in the debut of Tesla’s first commercial vehicle, an electric semi-truck. Trainer also points out that Tesla still has problems with basic manufacturing and production, despite its promises of the moon and Mars. Tesla’s main vehicle production facility is located in Fremont, California. Tesla’s production delays and problems are not isolated incidents. The electric vehicle (EV) market is seeing increasing competition. Last October, the Chevy Bolt sold more than all Tesla models. In 2017, Chevy shipped over 23,000 Bolts. Tesla must address its production problems or its long list of potential customers will abandon the Model 3 in favor of more affordable options. Tesla quickly received 373,000 pre-orders of the Model 3 and charged $1,000 to be on the waiting list.
Tesla, which is based in Palo Alto (California), has strong supporters and is listed on Statista’s Top 10 Most Valuable brands within the automotive industry. The Tesla brand is worth $5.88 billion, and Tesla was the first to make it into the top 10. Toyota, on the other hand, was ranked as world’s most valuable brand for cars in 2017, having a brand value $23.5 billion. In February 2018, Tesla produced its 300,000. The new Tesla heavy-duty electric truck could be a game changer. On Wednesday, March 7, the electric trucks made their first production cargo trip. They transported battery packs from Tesla’s Gigafactory (Nevada) to Fremont’s car-assembly plant in Fremont. Tesla is currently considered a niche luxury car manufacturer and not a commercial truck maker. Tesla’s sleek semi-truck was unveiled in November. They also announced their entry into the $719 billion freight shipping market. This news generated immediate enthusiasm for the truck. It can travel 500 miles on a single charge and can accelerate from zero to 60 mph in just five seconds. While full production is not expected to start until 2019, companies have already placed orders for the big electric rig. According to CNN Money, Walmart, Meijer (a Michigan-based supermarket chain), J.B. Hunt Transport Services and Pepsi have placed orders for Tesla Semi. Each truck requires a $5,000 deposit. According to CNN Money’s auto expert Peter Valdes-Dapena, the Tesla Semi will be used primarily for short hauls. However, the truck is expected to make a big impact in the industry. Some extreme fans believe Tesla will be the next Apple Inc. Apple doesn’t have to deal with the same production problems that Tesla has. Limited battery availability is one of Tesla’s main production problems. The batteries for Tesla cars are currently manufactured by Panasonic. The battery being made is an older technology, and there are unlikely to be any other buyers for this technology in the automobile market than Tesla. According to a Seeking Alpha article, Panasonic is unlikely to increase its production capacity for this battery. Tesla will switch to a new type of battery in the second half 2018. These production delays and capacity problems have also caused Tesla’s operating costs to soar.
Speaking of rising costs, Tesla will pay CEO Elon Musk $2.6 billion in long term compensation. This massive increase in compensation for the company, which has yet to make a profit has caused some concern and negative feedback from investors. This wouldn’t be an issue if the company were profitable. Tesla stated that it was aiming to achieve a market capitalization of $650 billion. The company’s market cap at the moment is $56.6 billion. This is a very ambitious goal. Toyota currently has a market capitalization of $185.7 billion and earns $15 per share. Tesla is currently losing -$11.83 per shares and has been spending more to meet its production targets for its Model 3 than it should. Tesla’s extravagant spending is quite alarming for some investors. Tesla stockholders have previously challenged Tesla’s reckless spending. Stockholders filed a lawsuit against Tesla after it agreed to purchase SolarCity Corp, which was the largest US rooftop solar system installer, for $2.6billion in August 2016. Two of Musk’s relatives co-founded SolarCity. The plaintiffs claimed that the Tesla board, which Musk chairs, violated their fiduciary obligations by approving the acquisition. According to motor1.com, Tesla’s current spending pace is so high that it is expected to run out cash by Monday, August 6, 2018. Tesla is likely to return to the capital markets in the first half of 2018, due to large debt repayments and Capex commitments. This will allow Tesla to replenish its cash reserves with a bond offering.
Tesla believes that aggressive spending is necessary to achieve their ultimate goal.
“Yes. “Yes. Musk stated that new lines must be invested or overtime will be required, which adversely affects gross margin.” Seeking Alpha also claims that Tesla has aggressively reduced its Model S and Model X cars to maintain sales levels. They are also suffering higher losses due to these discounts. But Tesla’s diminishing cash position makes steeper discounting an untenable option. Further complications are the increase in interest rates, commodity prices, and cobalt prices which have risen from $10 per pound to $37. Investors were undoubtedly nervous after the resignation of Eric Branderiz, their chief accounting officer, and controller. This isn’t the first high-profile departure. A month earlier, John McNeill, head of the sales & service group, had resigned. Bloomberg reported that Branderiz was paid a base salary in the range of $300,000. Branderiz’s most appealing benefit was his $5 million stock equity award. This will be fully vested after four years of service. This suggests that Branderiz left a lot of money on the table by leaving early. This makes it more difficult for companies that are aggressively building up debt.
David Trainer from New Constructs claims that Tesla promotes itself as being long-term-focused, but it seems that it spends more time on publicity stunts such as sending a Roadster on Mars than it does on reaching its production targets. He said that Tesla cannot meet simple production targets and it is difficult to take them seriously. Trainer believes that Tesla is a distant competitor to major car companies like Ford and Toyota. While Tesla has the advantage of producing high-quality electric cars in the EV market, Tesla will soon be challenged by more established auto manufacturers. According to The Economist magazine, the EV market will see a significant increase in competition over the next 20 years. According to The Economist magazine, while the EV market currently accounts for a tiny portion of American vehicle sales and 1% worldwide, it will grow to 10% to 15% of the market by 2025. This is only the beginning. All indications point to the European Union outlawing all petrol and diesel-powered cars by 2035 and an electric car market in western Europe. China, France, and Britain have also announced that they will ban all internal-combustion engines by 2040.
Over the next 20 years, the global car market will undergo dramatic changes. Nevertheless, a lot of car manufacturers such as Honda and Toyota, Hyundai, GM Mercedes-Benz, Mercedes-Benz, and Volkswagen are hedging with hydrogen fuel-cells instead of committing to cars powered solely by a lithium-ion batteries. Mercedes will soon launch a plug-in hybrid SUV which combines a fuel-cell generator and a battery pack. The next step in hybrid technology will be an electric vehicle that can generate its own electricity using a fuel cell. However, Elon Musk said in 2015 that fuel cells will not be commercially viable due to the inefficiency of producing and transporting hydrogen.
Tesla stock was IPOed on June 29, 2010. It traded on the NASDAQ under the ticker symbol TSLA. The original price was $17 per share. A $1700 purchase of 100 shares at the IPO price would have brought it down to under $35,000 today. The stock also performed exceptionally in 2017, rising from $178.19 in November 2016 to an all-time high $389.61 in September 2017. The stock has been in sideways consolidation since then, fluctuating between $292.63 to $360.50. A sustained selloff could cause the stock to fall below its 200-Week moving mean, which is currently at $251.
On two occasions, the 200-Week moving mean proved to be a good place to buy shares. A breakout above $389.61 could send the stock soaring to over $500 quickly, due to the high short interest in TSLA. TSLA would rise higher due to a short squeeze, which would cause short sellers to rush to buy shares to make up their short positions. Short selling is a wager against a stock. Short sellers make money when the stock price drops. TSLA is a stock short sellers hate. Currently, the short interest in TSLA equals roughly 30% of all shares that are available for trading (the float). The short interest in Ferrari NV (NYSE symbol: RACE), which Investors Business Daily rates as the best stock within the Auto Manufacturers Group is only 3.5 per cent, is in contrast. Even though RACE stock has increased 80 percent to $131.20, the short interest in RACE remained low. The short sellers may not be as excited about shorting RACE stock, which actually earns $3.50 per share profit and pays a.69c per share dividend. Also, Ferrari CEO Sergio Marchionne stated that Ferrari NV would make a new supercar powered by batteries to compete with Tesla Inc. in the high end electric car market. Marchionne stated that it is time for a shift within the industry and that less than half of cars will be combustion-powered by 2025 as gasoline and diesel are replaced with hybrid, electric, and fuel cell drivetrains. Marchionne also predicted that car manufacturers will need less than a decade for retooling in order to survive in an age of new technologies.
Tesla is clearly at the forefront of the changes that are coming to the auto industry. However, this wave of change is only a small ripple at the moment. It is not a guarantee that you will be the first to move in an industry, nor that your company will survive. Tesla has been one of the most innovative and dynamic companies in the last decade. But will Tesla run out on borrowed money before it can ride the wave of change? Only time will tell.