Tesla Inc (NASDAQ:TSLA) has been behind some groundbreaking products over the past decade. It has made mass-production for large lithium batteries a reality. It’s built battery storage devices for homes using solar, making them completely independent of the energy grid. And of course, TSLA has built world-class electric automobiles and produced them in large volumes.
While the company has done all this — and will seemingly do more — is it worth your investment dollars?
The problem with TSLA stock isn’t the products; the vehicles are remarkable. Rather, worries stem from Tesla’s financials and management continually missing the lofty targets it sets.
Management had originally forecast that it would produce 500,000 cars this year. 100,000 of those units would be the S and X, while the rest presumably would be the “3”. Only it has been “production hell,” in the words of CEO Elon Musk. In its latest letter to shareholders, TSLA is aiming to increase production of the Model 3 to 2,500 per week by the end of Q1 (the end of March) and reach 5,000 units per week by the end of Q2.
Will it happen? History has us leery.
Despite the company’s spotty track record, investors continue to back TSLA. Famed short-seller David Einhorn and Jim Chanos have taken short positions in the name and have been unable to crack the Tesla stock price. More than 23% of shares are currently sold short, which actually doesn’t seem like that high a figure for a company like TSLA.
In either regard, investor faith remains strong for Musk. One reason? Even though management continually misses its goals, they eventually hit the mark. It might take an extra quarter or two, or 2018’s targets might become 2020 milestones. But ultimately, it works out.
As they say, aim for the stars and land on the moon (or Mars, in Musk’s case). The bottom line is, it’s hard to bet against Musk. He puts every ounce of energy he has into his companies and inventions. He also puts a great deal of money into them too. So it’s not as if I want him or Tesla to fail. Quite the opposite really.
But the financials do worry me.
The company is sitting on about $10 billion in debt and over the last 12 months had a free-cash flow deficit of roughly $4 billion. That doesn’t spell good things, although much of that can be attributed to the production ramp of the Model 3. On the plus side, operating cash flow (OCF) came in at $510 million last quarter (a quarterly record for TSLA) and was close to break-even last year.
Sitting on $3.4 billion in cash is pretty good, reassuring investors that the automaker should not need to raise capital anytime soon.
Obviously, TSLA stock is not valued like a typical automaker. Despite having nothing close to the financials of General Motors Company (NYSE:GM) or even Ford Motor Company (NYSE:F), Tesla stock has a larger market cap than both.
If the company can build on its OCF momentum, then its stock could have a chance to breakout from the longer-term range it has been in. That would require a move above $360 though. As you can see on the chart, this level has been stiff resistance. There’s support between $300 and $320, and while it may not hold, a small uptrend (blue line) may be in the works. For that to stay true, we need the broader markets to hold up as well. We can see in February when the S&P 500 lost altitude, so too did Tesla.
If the Tesla stock price pushes through $360, $390 would become the next target.
So should you buy? Bullish investors can buy and use a close below any of the three support levels we just highlighted as their stop-loss (depending on their risk tolerance).
Additionally, they can consider buying GM instead. It has a lower valuation, better financials and a strong management team.
Further, the company’s potential to build a fleet of self-driving taxis is very promising and can lead to big-time returns for the automaker. Finally, the stock has a great risk/reward entry, with strong, long-term support near $37. If this level fails, we can cut our position with very small losses, and it pays a 4% dividend yield to help us along the way.