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Avoid Tesla Inc Stock as Its Financial Batteries Continue Draining

Tesla stock - Avoid Tesla Inc Stock as Its Financial Batteries Continue Draining

Source: Tesla

Tesla Inc (NASDAQ:TSLA) stands at a crossroads. As the company transitions itself into more of a mass market company, capital has become more critical than ever. However, while its bonds have fallen to junk status, the company is at least two years away from profitability. Although Tesla will drive much of the world’s tech innovation in the near term, the financial status of the company makes Tesla stock a risky gamble at these levels.

Tesla Stock Thrives on Innovation Leadership

Many worried about who would lead tech innovation after Steve Jobs passed away in 2011. Apple Inc (NASDAQ:AAPL) has lost much of its innovation leadership since the passing of Mr. Jobs. Now, Elon Musk has emerged to fill much of that void.

No question Musk’s inventions have changed the world. His creative acumen first came to fruition with Paypal Holdings Inc (NASDAQ:PYPL). It continues with SpaceX and the inventions related to Tesla itself such as its automobiles and the upcoming Tesla Solar Roof.

Renewables failed to take off in past decades because fossil fuels always remained more economical. Thanks to Mr. Musk, the economics of renewables have been altered. Now, his battery-related innovations are forcing even the most ardent pro-oil right-wingers to embrace green energy.

This lower-cost green energy that has driven Tesla stock in recent years. Tesla’s market cap exceeds that of Ford Motor Company (NYSE:F) and at times, that of General Motors Company (NYSE:GM). This happens despite the fact that each company produces over 50 times as many cars as does TSLA.

The Tesla stock price took leave of the fundamentals years ago. Today investors value the company on its potential. However, the current junk status of TSLA bonds calls that potential into question.

This worry caused Tesla stock to plunge. TSLA stock recovered some of the loss on word that the company would not tap capital markets this year. Production numbers have also shown steady increases, though they fell below company goals.

Consensus estimates forecast the company’s first profitable year will come in 2020. Analysts estimate $8.08 per share in earnings that year. At today’s prices that brings the 2020 forward price-to-earnings (PE) ratio to just under 40.

Tesla Stock and the Perfect Storm

However, the battery company must learn to better manage its financial energy for profits to occur. I agree with Mr. Musk that Tesla must seek lower price points. Going by the Diffusion of Innovation Theory, most of the early adopters likely already own a Tesla. Winning over the next market segment, the early majority, will require TSLA to increase production exponentially.

Unfortunately, Mr. Musk appears to lack the business acumen that Steve Jobs displayed. Jobs took Apple from the brink of bankruptcy and restored investor confidence and profitability within a short time. Fifteen years after its founding, Tesla still faces continuing losses. Also, company economics have worsened in an attempt to produce the lower-cost Model 3 in sufficient quantities.

At these high stock prices, one option to raise capital includes stock dilution. While that bodes poorly for current holders of Tesla stock, the company may have no choice. The future of the company, not to mention Tesla stock, hinges on attracting the capital to finance that increased production. Finding that capital with a junk bond rating leaves few other options available.

The Bottom Line on Tesla stock

Although TSLA innovations serve as game changers to the tech world, an uncertain financial situation makes Tesla stock one to avoid at this time. The affordable renewable energy that Tesla makes possible will change the tech industry and alter the world economy at large. However, Mr. Musk has not figured out how to bring these changes in ways that will yield profits for Tesla stock.

Today, the company faces the perfect storm of junk-status bond ratings and a need to increase production exponentially. With losses expected for at least the next two years and capital only available at a high cost, where the needed capital comes from remains unclear.

Investors will likely have to face higher debt levels, stock dilution, or a possible bankruptcy to meet this goal. Since none of these options are likely to benefit Tesla stock, investors should look elsewhere for gains.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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