Suddenly, there are some cracks in the armor at Tesla Inc (NASDAQ:TSLA). The TSLA stock price has dipped about 2o% from mid-September highs.
Even with investors stepping in so far this month, I don’t think the decline has ended. As I’ve written many times before, the TSLA stock price is the barometer of an argument of what Tesla earnings will be next decade and beyond. Modeling those earnings comes down to confidence in Tesla’s products, quality and execution.
And it’s starting to look like that execution seriously is being called into question. I asked in August if TSLA stock could survive any more broken promises. With Model 3 production the latest in a series of disappointments, that question seems more urgent than ever.
Model 3 Problems
The response from most TSLA bulls to the disappointing levels of Model 3 production is to advise patience. On this site in October, Luke Lango pointed out that production of the Model S and Model X started at similar levels. In both cases, early issues were fixed, and production schedules improved substantially and quickly.
It’s a fair point, and it’s not as if Model 3 production is going to stay stuck at the three-per-day level cited for the beginning of the quarter. But the problem isn’t so much the nature of the ramp as the promises made. CEO Elon Musk guided for production of 1,500 Model 3 vehicles in Q3 as recently as August into the quarter. The figure instead was less than 300.
And it’s just another in the series of broken promises from Tesla. “It’s just one quarter,” TSLA bulls say in response to the Q3 production miss. But it’s not. Second-half 2017 production was supposed to be 100-200 thousand, according to Musk in May 2016, as the Wall Street Journal pointed out last month. The company will wind up nowhere close.
Musk said last October that there was no need for a capital raise for the Model 3. Tesla then issued stock in March, diluted shareholders and raised debt in August, though it framed that raise as simply providing a cash cushion.
The point here is that while the bottleneck itself is a short-term problem — and a fixable one — it’s part of a broader pattern. Musk continues to overpromise and under deliver. At some point, that erodes the confidence investors hold in the company. Indeed, the debt issued in August already is selling below par, showing that risk-averse bondholders see the recent events as potentially meaningful.
Confidence in TSLA Stock
The problems aren’t limited to the Model 3. The Buffalo facility is behind schedule. SolarCity was barely mentioned on the Q3 conference call, and the promised solar roof tiles haven’t materialized. Increasingly, at least from my vantage point, the confidence in both Musk and Tesla is starting to fade.
And in that context, the revealing of Tesla’s truck on Thursday feels more like a sideshow than a positive event. To the biggest TSLA skeptics, the truck looks more like a distraction than positive news. And I’d expect the coverage of the event to give a good signal as to where the TSLA stock price is heading. When Musk inevitably promises full production by 2019 or 2020, as sources have suggested, will investors believe him? Or will the project look more like a potential distraction or disappointment?
It’s not just a matter of promises, either. The bull case for TSLA is based in large part on its huge head start in EVs and in batteries over legacy manufacturers like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F), not to mention European carmakers. Every quarter that Tesla’s story slows down is another quarter for those rivals to close the gap.
The TSLA Stock Price Is Going to Move
Given the nature of the stock, I’ve long counseled humility when it comes to TSLA. Again, this is an argument about cash flows years, and decades, into the future. (That’s one reason why I’ve never taken a position in the stock, from the long or short side.)
But because that argument is based mostly on investors’ best guesses and factors well beyond even Musk’s control, volatility is to be expected. And I’d expect volatility to ramp up over the next few months.
If Musk can get the Model 3 back on track, TSLA stock likely will do the same. Enthusiasm toward the autonomous vehicle space as a whole hasn’t dimmed, as witnessed by big gains at potential suppliers like Nvidia Corporation (NASDAQ:NVDA) and Delphi Automotive PLC (NYSE:DLPH).
But increasingly it looks like investors are losing patience with, and enthusiasm for, Tesla itself. Broken promises are one thing when the company seemingly always delivers (eventually). But if it looks like Tesla simply has bitten off more than it can chew, the support underpinning the stock can erode quickly.
I doubt we’ll get to that point any time soon, and I’d expect the Model 3, and Tesla as a whole, to right itself enough to keep the story going through 2018. But if that doesn’t happen, the downside here could be steep.
TSLA stock is all about confidence, and both TSLA and Musk are losing a little bit of that confidence. It’s going to take more than the revealing of a truck to change that trend.
As of this writing, Vince Martin has no positions in any securities mentioned.