Alas, it is no fun being a value investor in an overbought market. I learned my lesson the hard way back in the dot-com bubble of 1999-2000. The greatest of all companies were flying high, and I felt like a genius. Then the bubble burst, and I lost all the money I made during the run-up. Many of the dot-com companies never made any profit and were burning cash like they had no value. Well, here we are again, and companies like Tesla Inc (NASDAQ:TSLA) are in the exact same situation.
TSLA stock has roared to mega-heights on the back of a product that will take forever to get to market, never sell enough to justify TSLA’s valuation, and has competition coming its way.
I’ve long believed that Elon Musk has helped push TSLA stock to its insane valuation because he talks a fantastic game and does have a few really cool cars on the road that very few people can actually afford. Tesla stock is pushed up by both individuals who believe in the long con Musk is playing, and the institutions that must own TSLA stock in order to show their clients that they own a well-performing stock.
TSLA’s Unfulfilled Promises
Yet basic TSLA news, and Musk’s inability to actually address this news, should concern bulls. The Wall Street Journal reported that the much-hyped Model 3 was indeed in production — by hand. Another source even says that the Model 3 is still being developed. Wasn’t this the car Musk said would be delivered in 2016?
Musk himself finally admitted that the car was in “production hell” via a tweet. The company produced 260 of the promised 1,500 cars in Q3.
Meanwhile, even though most vehicle charging is done at home, Tesla insists on jamming out thousands of superchargers around the country. It has 2,000 installed, yet will not come anywhere near to the 5,000 it promised by year-end.
Tesla does lots of promising but never seems to deliver.
Oh, and TSLA also is recalling 11,000 of its SUVs because the seats could fail in a crash.
The Bottom Line on TSLA
What I find eternally mystifying are the Tesla stock bulls who insist the company is worth its $59 billion market cap. Let’s remember, Tesla stock keeps going up even though the company has never made a profit. Net loss for FY15 was $889 million and $773 million for FY16. Its TTM loss was $766 million.
TSLA has these losses despite revenue increases. Tesla managed $7 billion in revenue in FY16, up from $4.04 billion in FY 15. It even has $10 billion in TTM revenue.
Yet it burns through cash faster than it can raise capital. Free cash flow was negative to the tune of $1.03 billion in FY14, $2.15 billion in FY15 and $1.56 billion in FY16. Over the TTM, free cash flow was negative $3.14 billion.
This is ridiculous.
Yet bulls say, “Nothing will stop Tesla!”
Well, not having employees may stop Tesla. The company fired 400 workers this past week. In typical Tesla fashion, they were let go was for “performance reasons” as part of a “company-wide annual review.”
Bulls insist that the Model 3 will be cost-efficient, available for “only” $35,000. But when you dig in to reality, you find the real price is probably going to be something around $50,000. Sorry, but that prices out most of America.
If you own TSLA stock, sell now and book those profits. You’ll thank me later.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].