Focus on the Tesla Stock Big Picture, Not Musk’s Continued Weirdness

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Tesla stock - Focus on the Tesla Stock Big Picture, Not Musk’s Continued Weirdness

Source: Elon Musk via Twitter

Just when you thought the Tesla (NASDAQ:TSLA) saga couldn’t get any weirder, it gets weirder, but Tesla stock still hangs on.

A week ago when Tesla founder and CEO Elon Musk engaged in a largely offensive spitting match on social media with one of the cave divers who helped rescue a boys soccer team trapped in a Thai cave, I wrote a very similar thing. Musk called the man, who had slammed Musk’s mini-submarine design, a “pedo.”

But, that wasn’t the final curtain. Instead, the Tesla saga has since become even weirder. And this time, the weirdness has meaningful financial implications for the stock.

The Wall Street Journal reported recently that Tesla is asking for cash back from its suppliers in order to help it become profitable in the back-half of 2018. That is a weird move.

It isn’t unusual for automakers to try to negotiate prices down with suppliers as part of standard procurement negotiations. But, asking for cash back is a bit strange.

Granted, Musk has since tweeted that such refunds include costs that actually apply to the third quarter and beyond, and importantly do not include historical cost savings.

That removes some of the oddity in this situation. Yet, asking for any cash back at all does underscore just how cash-strapped Tesla is, and how much near-term financial stress the company is under to produce a ton of Model 3 vehicles in the near future.

When it comes to Tesla, though, investors would be wise to ignore the near-term noise, stomach the stock price volatility, and focus on the big picture.

Here’s a deeper look.

Tesla Asking for Cash Back Is Weird, but Not Worrisome

It is no secret that Tesla is trying to change the world. The company has completely changed the culture around the electric vehicle market. They have made electric vehicles as much of a “status” thing as they are an “economic” and “utility” thing. Now, the company is trying to push that culture mass market by mass producing the affordable Model 3.

It is also no secret that changing the world comes with it own set of challenges, and that the road will have its fair share of speed-bumps.

Tesla asking for cash back from suppliers is one of those speed-bumps and nothing more. Tesla is obviously under a great deal of near-term financial stress. We can all look at the balance sheet and cash flow statements, and see the dwindling cash balance and alarming cash burn rate.

But, the Tesla Model 3 is also the most profitable electric car in the world, generating profit margins in excess of 30%, according to long-time Model 3 skeptic and industry insider Sandy Munro. Thus, once Model 3 production scales and investments into production ramp peel back, Tesla will be generating huge profits.

Asking for cash back from suppliers is simply a speed-bump in the path towards those huge profits. Suppliers will largely understand this and agree to Tesla’s reasonable requests.

Therefore, as a result of these requests, Tesla will get a bunch of cash and take one step closer to sustainable long-term profitability.

Big Picture Remains Promising for Tesla Stock

When it comes to Tesla stock, investors would be wise to ignore all the near-term noise and focus on the big picture.

Fortunately, the big picture here remains quite promising. The company has about 450,000 Model 3 deposits. Although refund rates have been rising amid production delay concerns, the company is also collecting new deposits at a healthy enough rate to largely offsets rising refunds.

Thus, overall demand for Tesla’s mass-market Model 3 vehicle remains robust.

So long as this remains the case, and Tesla doesn’t lose demand share to another electric vehicle company, then Tesla will eventually and inevitably scale production of the Model 3 to mass-market levels, and the company will sell a ton of Model 3 vehicles at 30% profit margins.

Next, Tesla will repeat that same process with electric semi-trucks and the rumored Model Y. And revenues, market share, mind share, and profits will keep heading higher.

Overall, Tesla is still in the process of transforming into the world’s biggest, strongest, and most favorable electric vehicle company. Considering the electric vehicle space is one with huge long-term growth drivers, Tesla stock, too, is supported by huge long-term growth drivers. At $300, those long-term growth drivers are dramatically under-appreciated.

Bottom Line on Tesla Stock

There is a lot of near-term noise in the Tesla growth narrative. Thus, if you have a short-term time horizon and/or can’t stomach volatility, avoiding Tesla is probably the best thing to do.

However, if you have a long-term time horizon and/or can stomach volatility, Tesla stock is a buy-and-hold. Adding some on big dips to $300 and selling some on big rallies to $350 is a good way to profit from the noise.

But, it’s good to have a long-term core position because, long-term, this stock could head way higher than $350.

As of this writing, Luke Lango was long TSLA.


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/tesla-stock-musk-weird/.

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