On Thursday, shares of Tesla Inc (NASDAQ:TSLA) sunk 2.3% to roughly $294, before rebounding toward $300 on Friday. The decline in Tesla stock wouldn’t be that significant, if it didn’t come on reports of the company’s planned Model Y SUV production.
According to reports from Reuters, Tesla will begin producing the Model Y in November of 2019. Just as the Model 3 is a more affordable sedan compared to the Model S, the Model Y will be a more affordable option compared to the Model X SUV. In February, CEO Elon Musk told us the company would aim to produce 1 million units of the Model Y per year, although he did not provide a timeline for this goal.
You see, there are already a mountain of concerns surrounding the production of the Model 3. Musk said it best when he called it “production hell.” Coming into 2018, the goal was for Tesla to produce 2,500 units a week by the end of the first quarter and 5,000 units a week by the end of Q2.
Following an all-out push going into quarter-end, Tesla produced 2,020 in the final week of Q1. The company said it still plans to be producing 5,000 Model 3 units a week three months from now. At that point, it will have been about a year since official production (although limited production at first) began in July 2017.
On the plus side, the Model Y will be built on the same platform as the Model 3. That should lead to less production headaches down the road. But, it is worth pointing out that the Model X is built on the same platform as the Model S, and it didn’t have the smoothest rollout. So we’ll see if Tesla learned from its previous operations.
All About the Money
Sometimes Tesla reminds me of an overly optimistic home renovation contractor. While they talk about the grand, amazing features they can add to your house, all you’re trying do is try to keep up with the mental calculations on how much it’s going to cost.
In the case of Tesla, here’s what we’re working with: the rollout of the Model 3 has been slower-than-expected, which is weighing on revenue and hurting free-cash flow. The company also already introduced its new semi truck and ultra-fast convertible with the Roadster. It’s building out its Gigafactory (in Nevada) and looking to build a factory in China too. Musk also told us that capital investments for the Model Y would likely begin at the end of 2018. Lastly, should Tesla ultimately hit its production targets, we’re looking at the automaker needing a new production facility too.
Don’t forget that Tesla now carries $11 billion in debt vs about $3.5 billion in cash and is still shouldering its acquisition of SolarCity.
This might sound like a hit piece on Tesla stock, but it’s not. I genuinely like Tesla’s products and love Musk’s vision for a cleaner, better tomorrow. Plus, the cars are gorgeous. At times though, it simply seems like Tesla puts too much on its plate vs. what it’s capable of eating at the moment.
At some point, the financials of the situation need to be taken into account. Countless analysts and Moody’s, a credit rating agency, have all said the company will need to raise capital to survive. Musk argued that point Friday morning. Taking on more debt seems ill-advised, while a secondary offering is always on the table.
Unless production of the Model 3 improves significantly, a capital raise likely becomes a “when,” not “if” scenario.
Goldman Sachs Says Sell Tesla Stock
Earlier this week, Goldman Sachs analyst David Tamberrino pounded the table on Tesla stock. He reiterated his sell rating and slashed his price target to $195 from $205. From current levels, Tamberrino’s price target implies about 35% downside to the TSLA stock price.
He’s also one of the analysts that expects a capital raise at some point in 2018. He also says sales for the Model S and Model X could suffer as federal EV tax credit fade for the vehicles in the second half of 2018. Finally, he expects Model 3 production to fall short of management’s forecast for the second quarter.
So should you sell?
We nailed the move on Tesla stock from $250 to $300. Now back at our $300 target, let’s keep it simple. Above $300 and we can be long TSLA stock, below and we want to avoid it. Just be careful of the stock chopping around this level if you’re using a stop-loss.