Tesla Motors Inc (NASDAQ:TSLA) makes an incredible product. Elon Musk is a genius. His electric car-making monster has the potential to change the transportation industry and even the world forever. And together, this has made some Tesla stock holders very rich in the process. It’s tough to argue any of this.
The thing is, sometimes “disruptors” can’t actually find a way to make their big dreams work in concert with the accountants … and that seems to be the case for Musk and Tesla.
Tesla announced last night that the company would be selling $2 billion worth of additional TSLA stock in a secondary offering — the completely unsurprising follow-up to the company’s announcement that it would be pushing up its annual production target to 500,000 units by 2018. Tesla needs infrastructure to build that many cars, and the money had to come from somewhere … because it didn’t have it on hand.
Dreaming big is great, especially when you’re privately held. But once you hit the public markets — and that’s where Tesla stock is — you can only kick the can so far down the road before investors start to get antsy. The selling in TSLA since April is one indication that some investors are getting fed up with the disconnect between dreams and how they’ll be achieved.
And the past couple announcements from Tesla make it seem more and more likely that famed short seller Jim Chanos is right on Elon Musk and TSLA stock.
Right now, anyone in or considering entering Tesla stock needs to separate any thoughts about the brilliant man from his money-losing entities.
Some Shady Business in Tesla Stock
Companies execute secondary offerings all the time, so the idea of selling more shares is nothing new. Shareholders get diluted this way all the time. And depending on the company, it’s not necessarily a bad thing in the long run.
What has a lot of investors furrowing their brows is the way this Tesla stock sale was announced.
On the morning of Wednesday, May 18, investment bank Goldman Sachs Group Inc (NYSE:GS) upgraded TSLA stock to “Buy,” giving it a new price target of $250 and saying it was undervalued by 22%. As expected, Tesla shares shot upward.
Then, after the market closed, Goldman Sachs and Tesla were intertwined in another way.
Tesla Motors announced that it was going to sell an additional $2 billion worth of TSLA stock to help build out what it needs to produce all those Model 3s. The offering is being led by underwriters Morgan Stanley (NYSE:MS) … and Goldman Sachs.
That’s right. Goldman Sachs lauded TSLA, then showed up to sell those suddenly hyped shares to investors.
Activists, journalists and other market pundits took to Twitter, and other media outlets to vent their frustration and legality of the deal.
At the very least, it’s a pretty bad look for Tesla.
A Bigger Issue
The shady “pump-n-dump” is bad on its own, even if it’s legal, which it most likely is. But it does highlight some greater concerns.
For one, Tesla can’t live on deposits and reservations alone.
TSLA can’t make enough money selling cars. The company hasn’t turned an annual profit since day one, and it continues to do so. In its most recent quarter, TSLA still lost 57 cents per share on over $1.6 billion in sales. Cash flows at TSLA remain less than ideal as well. Capex and production costs obviously are on the rise as it tries to ramp up production.
Musk estimates that capital expenditures will increase by about 50%, or $750 million, this year to meet its original production targets. And let’s not forget, most analysts predict that off the bat, those cars won’t be sold at a profit.
When Tesla was just a small niche manufacturer, producing a small set of electric cars for the rich, it could handle making only a few cars per year. Even then, it wasn’t making any money, but expectations for profits were well down the road.
But now we’ve traveled down that road, and Tesla is moving into the masses’ hands … and it still doesn’t have the cash to produce the darn thing in the numbers it wants to make. Tesla can’t even properly forecast its deliveries one quarter out.
Jim Chanos highlighted these concerns multiple times, with the money quote: “Becoming a car manufacturer is a lot more difficult than becoming a high-tech darling.”
The struggle is real for TSLA to hit critical mass, and this shady-looking stock deal underscores just how much help Tesla needs.
TSLA Stock: Separate Dreams From Reality
This need to raise cash further highlights how much Tesla is about hope and future promise than pure investment prowess. There’s no denying that Tesla stock has been a monster performer since its IPO, but the stock essentially has been rangebound since 2014.
The company continues to lose money, it needs outside money to keep going, and investors are starting to catch wise. That doesn’t look to stop anytime soon.
Chanos has a huge short position in the firm, but that’s too risky a proposition for most investors to touch. My advice would be to put TSLA stock in the “just sit back and watch” camp.
Tesla has phenomenal technology, but until it can prove that it can make the numbers add up, inconsistent stock performance will be the rule of the day.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.