With each passing week, the news for Tesla Inc. (NASDAQ:TSLA) just gets worse and worse, yet TSLA stock keeps holding its own evaluation so lofty that even writing about it is making me high.
Flawed Parts Causing Delays
A report over at CNBC quotes several current and former employees, who note that the ratio of flawed parts in vehicles is particularly high. According to the report, one current engineer believes that up to 40% of the parts made or received in its California factory require reworking. Apparently, this is one of the reasons for the Model 3 delays.
To the surprise of no one, Tesla denies that parts are reworked.
Were this news just a one-off, it might easily be dismissed. But report after report shows that Tesla’s Model 3 production is experiencing all kinds of problems — from battery production to cars not working properly. Because Tesla is a unique automobile, the size of the network of suppliers who can refurbish parts is small.
This news should be read in context with the fact that Tesla changed its production goal from 20,000 units per month in December to just 2500 units per month in March. As is customary with Tesla, no one seems to know exactly how many cars are going to be actually produced over any particular timeframe.
Personnel Changes & Debt Financing
Meanwhile the chief accounting officer for TSLA stock left the company, apparently for personal reasons. Then again, this fellow was the chief accounting officer at Sunrun, Inc. (NASDAQ:RUN), a solar installation company that has been heavily and rightly criticized for a business model that is in the midst of imploding.
Shall we also discuss the status of the interest rates being paid on the debt held by Tesla stock? Let’s remember that Tesla purchased SolarCity which was nothing more than a bailout for friends and relatives of Tesla CEO Elon Musk that held substantial stakes in the company. SolarCity carried a tremendous amount of debt, which was then pushed on the TSLA stock balance sheet. Now, we have the fact that the three-month LIBOR rate, against which most debt interest rates are pegged, including Tesla’s, has been rising. Not only that, it has been rising very quickly.
But wait, we aren’t done yet. I was talking to a civil engineer the other day, who happens to love Tesla vehicles in terms of their performance, who reminded me that the batteries that go into Tesla’s cars as well as its storage products have high amounts of cobalt. If you know about having a business that is in any way pegged to a commodity, such as cobalt, you know that there is tremendous risk involved because the price of that commodity can fluctuate.
That’s bad for TSLA stock.
In fact, cobalt prices have soared fourfold over the past two years — it’s almost $40 per pound. That’s really, really bad for TSLA stock.
Bottom Line on TSLA stock
That doesn’t just reflect on the costs it will take to make these vehicles, but it forces Tesla to possibly raise the cost of its vehicles past its already pie-in-the-sky $35,000 price point
But, hey, Tesla stock only had a $2 billion net loss last year, has never shown a profit and it’s negative free cash flow was only $4.1 billion in 2017. I’m sure there are plenty of rational people out there who think that the $55 billion valuation for Tesla stock is reasonable.
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 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
