In the battleground that is Tesla Inc (NASDAQ:TSLA) stock, the bulls took a nice victory this week. Tesla stock gained nearly 10% on Wednesday, the day after the company’s annual meeting.
The annual meeting provided quite a bit of news. Tesla shareholders voted down proposals that would have split the CEO and chairman positions currently occupied by Elon Musk and potentially required an independent chairman as well. Musk referenced the potential launch of the Model Y. And Tesla discussed its first international factory, to be located in Shanghai, China.
But the biggest news and likely the driver of the gains in Tesla stock was that Musk again referenced the company’s long-held 5,000 car per week production target, saying it was “quite likely” the company would reach that level by the end of June. That in turn leads to a sense that Tesla’s story is getting closer to playing out.
I’m skeptical that’s really the case, however. “Quite likely” isn’t the same as “definitely”. “5,000 per week at the end of June” doesn’t necessarily suggest consistent production at that level. As I and many others have written, Tesla stock comes down to trust. And I still question whether Musk and Tesla deserve that trust.
Why Tesla Stock Jumped
On this site, Luke Lango summed up the bullish argument for Tesla coming out of the annual meeting:
All together, there is just a lot of noise surrounding Tesla stock right now, the sum of which is rather meaningless in the big picture.
The only thing that really matters right now at Tesla is Model 3 production ramp. And right now, Model 3 production is ramping at an impressive rate.
I get this argument. Tesla stock is a long-term play. Years from now, investors will have (mostly) forgotten that Musk called analyst questions “boring [and] boneheaded” or that Tesla may have overreached when it came to automation. Every company has growing pains.
But once the Model 3 gets going, and Tesla becomes profitable and cash flow-positive, so much of the “noise” Lango describes will be quieted. The concerns about cash burn will end.
The insistence from outsiders (which set Musk off on that Q1 call) that Tesla needs to raise capital will come to an end. Shorts will cover, Tesla will rise, and investor attention on both sides will turn to the company’s bright future instead of the tough, present, work of building a worldwide automotive manufacturer.
It’s a seductive argument. It may even be the right argument. But for two reasons, I’m not quite ready to buy it.
Is Tesla Really on the Right Track?
The first reason is that I’m not ready to take Musk at his word. As I (and, again, many others) have pointed out before, Tesla has a long string of broken promises including several misses on Model 3 targets and deadlines.
Yes, once the Model 3 gets to consistent production that can meet the demand, the story surrounding TSLA stock changes dramatically. But it has to get there – and get there right. The endless stream of quality control issues and delays can’t just be written off.
Nor is Tesla hitting a round-number target of its own choosing at a date of its own choosing necessarily proof that those issues are behind it. Tesla could manufacture 5,000 Model 3 units in the last week of June. That doesn’t mean the company has reached those levels profitably and consistently for good.
Again, it’s a matter of trust. If Musk and Tesla can hit that target in a sustainable way, perhaps I’ll be more bullish on Tesla. But that is a clear ‘show-me story’ at this point.
Is Tesla Stock Worth It?
The second question is that even if Tesla does hit those targets, does it necessarily follow that Tesla stock will rise? The company already has a market capitalization of $53 billion, more than Ford Motor Company (NYSE:F) and not far below that of General Motors Company (NYSE:GM).
To be fair, including debt and pension expense, both larger rivals remain much more valuable on an enterprise basis.
“Making cars profitably” perhaps is a business model that suggests Tesla isn’t going to zero. It doesn’t, on its own, suggest that TSLA is going to $500.
I’m still skeptical of the long-term gross margin targets, which are much higher than those of Toyota Motor Corp (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC), let alone Ford and GM. I still question why Tesla is immune to the same “peak auto” concerns putting a lid on valuations elsewhere in the industry.
Even if Tesla bulls prove victorious in the near term, long-term upside isn’t guaranteed. Tesla still has an awful lot of work to do. Personally, I’d like to see it get a little further before putting my own money behind it.
As of this writing, Vince Martin has no positions in any securities mentioned.