Tesla Motors Inc (TSLA) stock took a tumble on Tuesday, falling 3%. That has brought Tesla’s year-to-date losses to nearly 22%, and the bullish aura that once surrounded the company and its stock is all but gone.
Investor sentiment has quickly deteriorated for Tesla stock because investors finally realize the company’s valuation is obscene relative to other auto makers.
When push comes to shove, TSLA is an automaker, and there is simply no way to justify even a $25 billion valuation when Ford Motor Company (F) and General Motors Company (GM) are worth roughly $50 billion each. After all, TSLA sold just 50,580 vehicles last year, while GM and Ford are pushing 10 million.
Therefore, TSLA needs to either add a new element to its business or rapidly accelerate the production of cars to create value for its shareholders. But according to Citron Research, there are supply and demand problems all around TSLA right now, implying that a rapid acceleration in production is not going to occur anytime soon. Hence, it needs a new operating segment.
Gigafactory creates that new segment.
Many Tesla stock bulls think that new business will rise from the company’s $5 billion “Gigafactory.” This is a 10 million-square-foot factory out in Nevada that will drastically increase the supply of batteries, which TSLA will use for both its own vehicles and also as a supplier to solar companies.
This potential supplier role has created optimism among bulls.
Tesla Stock Is a Knife, And It’s Falling
The problem is that TSLA is having issues with the construction of its gigafactory. On Monday, Bloomberg reported that about 100 workers walked off the job at the factory because of a growing dispute between Tesla and labor unions. While these 100 workers can surely be replaced, the loss creates a short-term delay for a company that desperately needs positive PR at this point in time.
Up to this point, Tesla CEO Elon Musk has touted that the construction of his gigafactory is ahead of schedule — a fact that bodes well for Tesla stock given that TSLA is already producing its Powerwall and Powerpack energy storage devices. Just one week after TSLA unveiled these two storage products in 2015 there were $800 million in orders, more recently including a big job with SolarCity Corp (SCTY) out in Hawaii.
However, despite these successes, given the declining sentiment for Tesla stock, the company still needs production to ramp in its Gigafactory so it can find an alternative revenue channel sooner than later. While TSLA insists that its union issues out in Nevada are no problem, investors don’t seem to be buying Musk’s word anymore.
After all, he has consistently over-hyped and under-delivered over the past year, with TSLA falling on the low end of Tesla’s 2015 goal for 50,000 to 55,000 deliveries set early in the year, and well short of analyst expectations for 65,000.
All things considered, 100 people walking off the job is probably irrelevant. It’s unlikely to cause a significant delay in the construction of Tesla’s gigafactory. However, the issue isn’t whether it causes an actual problem, but rather how it affects the current sentiment surrounding Tesla stock.
Based on TSLA’s action on Tuesday — and the willingness to buy what Citron is selling — perceptions don’t seem to be improving, and investors are weighing this news and Citron’s stance heavier than one would expect.
I suppose — at the end of the day — it all comes down to valuation. With TSLA at $25 billion, it’s still just too expensive for a company that faces supply and demand issues for its vehicles, a significant increase in competition by the big manufacturers and no revenue to collect from big orders of its energy storage devices.
The bottom line: The Gigafactory workforce news is not that big of a deal. Still, I wouldn’t buy Tesla stock or try to catch this falling knife.
Editor’s Note: The number of estimated Tesla deliveries has been corrected to 50,000-55,000. Analysts’ expectations were for up to 65,000 deliveries.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
