This Rebound Is A Lifeboat: Jump off Tesla Inc’s Sinking Ship Now

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Tesla stock - This Rebound Is A Lifeboat: Jump off Tesla Inc’s Sinking Ship Now

Source: Elon Musk via Twitter

Tesla Inc (NASDAQ:TSLA) had a disastrous month. In the company’s storied history, in fact, you could hardly think of a worse period for the company’s outlook. Just about everything that seemingly could go wrong is doing so now. And yet, Tesla stock remains resilient.

Sure, shares plunged from $350 to $250 in March. But they’ve already made back half their losses, giving bulls a momentary victory. Don’t get fooled though. Tesla stock’s rally is built on shaky support. This is a good chance to take some profits, because after a dreadful March, all the signs are pointing to Tesla stock going down.

Tesla: A Busted Story Stock

Elon Musk has a history of overpromising and underdelivering in a big way. Huge in fact. Since Tesla stock price bulls often seem to have selective memory, here’s a relevant Musk highlight. Back in October 2016, Wired reported Elon Musk saying that every Tesla car would be self-driving by now.

Specifically, we got the following gem of a quote:

“Musk said he could have a Tesla pick someone up from their home in LA and drop them off in the bright lights of Times Square, New York—then park itself. ‘It will do this without the need for a single touch, including the charger,’ says Musk.”

That was to be achieved by the end of 2017.

We’re now in 2018, and Tesla isn’t even close to that mark, as a fatal crash involving the company’s autopilot feature recently demonstrated. And that’s to say nothing of not needing to touch the interface or charger even once. So far, investors have largely given Musk a pass for his hyperbole. But at the end of the day, as a public company, you need to make money — selling a vision you can’t fulfill only gets you so far.

Tesla’s Setbacks

Tesla has had a long list of failures to deliver against its lofty expectations. Anyone remember how badly the Model X launch went? How Tesla Energy was so hyped up? How SolarCity collapsed, thus requiring a Tesla bailout? And the list goes on.

But the situation is getting more grave now. The company is facing issues on almost all fronts. For example, its past cars. Tesla announced a recall for more than 120,000 Model S vehicles last month due to problems with the power steering.

That sort of negative press comes at a bad time. The Model 3 has come out to mixed reviews. Many customers (the ones fortunate enough to receive theirs already) are complaining of problems with the touch screen, a battery that discharges much faster than expected, and other assorted glitches. While Tesla has always been noted for innovation, as Consumer Reports noted , Tesla has never been associated with producing an especially high-quality end product.

Model 3 Production Shortfall and a Reputational Blow

Along with the aforementioned issues, Tesla appears to be skipping over some quality control steps in its rush to get the Tesla 3 production ramp up to speed. As Elon Musk himself noted, he’s been stuck in a “production hell” lately as the company fails to deliver on its promised deliveries.

Some quotes he gave in a recent CBS interview were jaw-dropping. The interviewer asked if customers should be worried about receiving their ordered vehicles, to which Musk replied: “There shouldn’t be a question mark as to whether somebody’s gonna get their car, it’s just, yes, you’ll definitely get your car. It’s gonna be six to nine months longer than expected.”

Needless to say, I’ve rarely heard of other auto manufacturers delivering vehicles six to nine months after they promised a finished product. Tesla already raised the price of the Model 3 dramatically from earlier guidance, cut out teased features, and now can barely deliver vehicles within a year of when they had previously said.

The CBS interviewer followed up asking if customers were canceling their pre-orders. Musk responded with this gem: “It’s mostly like people cancel because, you know, they just needed a car and we didn’t have a car for them.”

Fewer Cars = Cash Raise

Tesla has suggested that it doesn’t need to raise more money in 2018. But they’ve said they weren’t going to raise capital in the past, and then gone out and did it anyways. As it pertains to Tesla stock, a capital raise should concern investors as the company’s finances continue to spiral out of control.

Bondholders appear to be getting fed up with Mr. Musk’s leadership. Moody’s downgraded Tesla’s bonds recently, and the price of them — issued just last summer — has already plunged more than 10%. That’s terrible for a generally stable asset class in such a short period.

It’s hard to blame the creditors for getting nervous though. Tesla appears on pace to lose around $800 million on a GAAP basis in each of the first two quarters of this year. Even assuming the losses shrink a bit later in the year, the company is still on pace to lose several billion this calendar year. Why wouldn’t Tesla try to raise cash while the market is still relatively forgiving?

Tesla Stock: The Story Is Collapsing

The credit rating agency Moody’s didn’t just downgrade TSLA’s debt, it also hit them with a negative outlook. That means they’re looking at cutting the credit rating even further if things don’t improve. Moody’s said:

“The negative outlook reflects the likelihood that Tesla will have to undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall.”

Moody’s suggested that a credit rating cut can be avoided if Tesla gets production to 5,000 autos a week by the end of June.

Given the company’s past performance, do you think they can get there? If you own Tesla stock, you better hope they do. Speaking of hope, when asked in the CBS interview asked if Musk felt pressured by having so many stockholders and customers trust in him: “Well, I hope their faith is not misplaced”.

…Reassuring.

Tesla stock has always been a story. People that get stuck in the numbers never understood the appeal of the stock. Investors who saw the vision were willing to hand their money over to Musk without looking at the numbers too closely. But with so many production problems, recalls, crashes, credit downgrades, and so on, Musk is running out of time. You can’t sell people a vision forever. As Musk said, customers place an order because they need a car. If Tesla can’t deliver, and soon, the stock is going to crash too.

At the time of this writing, the author held no position in TSLA. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/jump-off-tesla-incs-sinking-ship-now/.

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