Tesla Inc (NASDAQ:TSLA) — is it an investment or a fantasy? That should be the first question that every investor needs to ask themselves before buying TSLA stock.
Fantasy can be entertaining and it can feel great to be a part of something fanciful. And for Tesla stock buyers, it might very much be like having an opportunity to buy into Willy Wonka’s utterly fantastic chocolate company.
I’m referring to the 1971 film depiction of the 1964 novel by Roald Dahl starring Gene Wilder as Willy Wonka. In that film, bright technicolor showed off the unbelievable collection of candy inventions that made ordinary confections dull and dreary.
With an opportunity to buy into Wonka Works, I’m certain that there would be plenty of dreamers who would plunk down their cash on shares totally and blissfully ignoring all of the challenges of the business.
That’s the sort of the thing that Tesla CEO, Elon Musk, would make seem completely sensible if he were working with Wonka.
Yes, There Are Real Tesla Cars
Now, of course Tesla does make cars that do indeed work. Rising from the early days of his Lotus-derived Roadster that was plagued by glitches with a battery range that could go from “full” to “whoops,” the company now has made a few cars that drivers can motor about for a couple hundred miles, give or take. Less on some of the company’s cars that have the “Insane” or “Ludicrous” buttons that put a drain on their power systems for brief tire-shredding stoplight runs.
And I write a “few cars,” because so far the company’s lifetime shipments are approaching 200,000 cars. Putting that into perspective, rival automakers, such as General Motors Company (NYSE:GM) or Volkswagen AG (ADR) (OTCMKTS:VLKAF), make an average of 10 million cars each year.
So buyers of Tesla stock aren’t necessarily buying for results in terms of lots of cars sold, but something else.
Value? We Don’t Need No Value
It has to be the fantasy, as the stock is wildly overvalued compared to plenty of major and tech-savvy car companies with plenty of electric vehicles. Right now, TSLA is valued at roughly 12 times its book value. That compares with its major car company peers with their stocks valued at 0.8 to 1.5 times their book value.
That means that Tesla stock buyers are willing to pay around 11 times what the company could be melted down for, compared to plenty of peers that can be bought at a discount to their intrinsic value of their balance sheets.
And TSLA stock is trading at some 6 times what the Tesla sells on an annualized basis. That compares to industry averages of U.S.-traded car stocks that ranges from 0.29 to 0.42. That means Tesla stock buyers are paying as much as 20 times more than some other car company stocks are valued.
And it gets a bit more ludicrous, as the company loses more as it sells more. Its operating margin at the latest quarter is running at a negative 8.6%; meaning that for every dollar of stuff sold, it’s losing nearly 10 cents.
Buyers of Tesla stock must not be doing it to make money. For the return on Tesla’s assets is at a minus 2.1% and the return on Tesla stock holder’s equity is at a whopping minus 21.9%.
But where it starts getting insane is when the CEO stated at the release of the company’s quarterly results that the company is in manufacturing hell. Recently, he also stated that he thought Tesla stock is overvalued.
He said these things as he is trying to ramp up production to actually deliver the cars that people ordered months ago. The newest car, the Model 3, is going to take, by the company’s estimate, another $2 billion to get up and running. And that’s going to be a problem as the company just reported that it only has some $3 billion in cash.
And that doesn’t cover what it continues to lose making its other two cars, the Model S and the Model X, as well as its solar panel and stationary battery products.
TSLA Can’t Make It From Here
The trouble is that the losses from producing its current products is rising, and its capex last quarter of $1.2 billion nearly quadruples the year-ago quarter. But the company states that it has some credit left on its bank line amounting to some $1.83 billion. That will come in handy this quarter, which may see it go poof.
However, there is discussion that the company could just sell some more TSLA stock to the dreamers. Why not? If folks are willing to buy it now at 11 times or more what some major car company stocks trade, surely they will pay 12, 13 or more times for more Tesla stock.
Or the company could issue more debt. Although, bond buyers might be a bit less dreamy-eyed than your typical Tesla stock fan. After all, current liabilities (meaning shorter-term loans and bills) are up this quarter to $6.5 billion from $6.2 billion in the prior quarter.
Also, long-term debt is now sitting at $7.1 billion. And some $5.1 billion is debt that is attached to assets of the company, which means less capability to issue additional bonds at a reasonable interest yield rates.
But, Tesla stock buyers say to naysayers that the company will sell many, many more cars soon and they’ll all become believers.
Oh, And Another Problem for Tesla Stock
However, there is a looming dark cloud on the horizon. U.S. taxpayers give Tesla car buyers a $7,500 tax credit for each car. This starts to go away once Tesla sells 200,000 cars which, as noted above, isn’t far off.
Now, some say that the buyers of the $100,000 to $150,000 Model S might just bear the additional cost. But for the mainline Model 3 car that is vital to volume– at a currently advertised price of $35,000 — a net price hike of over 21% might be hard to swallow.
And some are already balking. Tesla is reporting Model 3 orders of 518,000, but that includes some 63,000 cancellations. And with most of the Model 3 buyers shut out of the tax credit, the cancellations should mount.
Just look at last April when the government of Hong Kong stopped its credits and Tesla car sales went from 3,000 per month to zero.
Then there’s the collection of states that give away additional taxpayer cash to Tesla buyers. It could be hard for them to keep helping luxury car buyers while schools are hurting for resources.
Others Make Electric Wonders
Then there is the growing competition. Already there are plenty of rival cars to the Model 3 in the U.S. market. Ford Motor Company (NYSE:F) has its electric Focus at $29,000. Nissan Motor Co. (OTCMKTS:NSANF) continues to offer its evolving luxuriously modern Leaf at $30,000. Kia Motors Corp KRW5000 (OTCMKTS:KIMTF) makes a nice and roomy Soul at $32,000.
And then there’s GM’s new Bolt with a range offered that meets or exceeds projected Tesla estimates for the Model 3 and is priced similarly and is on dealer lots right now with the tax credit intact.
As for the image of Tesla and the glamour of the pitch of the cars I have two points.
First, I’ve been in Tesla’s flagship Model S cars and the quality (as a car guy) is terrible. Fittings are erratic, upholstery needs to be upgraded and trim can be flimsy. And second, the real luxury and performance companies are coming with cars that car guys will truly love.
Audi (part of Volkswagen) is set to roll out a collection of its e-Tron models that will range from sedans, sports cars and SUVs. Geely Automobile Holdings (OTCMKTS:GELYF) and its exceedingly well-made new Volvo cars and SUVs are already dual gas-electric powered and are set to come with full electric versions shortly.
And then there’s the brand with loyalty that Tesla covets, Porsche (Volkswagen Group). Porsche has been working on its Mission E project, having blown minds and track records with its super electric, dual motor 918 hypercar. It is bringing a sedan that makes the Tesla look last decade and performance that’s truly Porsche. Add to that an electric version of its smaller SUV, the Mecan, and Tesla has trouble.
Sure, Tesla stock buyers love the stories of Elon Musk and his dreams. And if that does it for them, all the best to them. But for investors looking at value and return on their stock investments, Tesla stock should look ludicrous … at best.
As of this writing, Neil George did not hold a position in any of the aforementioned securities.