It is easy to predict that if the stock market crashes or corrects, expensive stocks will go down with it. But Tesla, Inc. (NASDAQ:TSLA) stock is not only expensive, its cash flow and debt levels are unfavorably weak too. If markets fall sharply, investors in TSLA stock will start questioning its valuations against its growth prospects.
Even though Tesla’s brand value and name recognition with consumers are both strong, the company is having a hard time sustaining elevated output levels of its Tesla 3. If this continues, TSLA stock could end up trading lower, without a chance of rebounding.
Tesla Remains Public
CEO Elon Musk alluded to Tesla going private in a tweet when TSLA stock was valued at $420. TSLA stock managed to rally at over $380 but that proved short-lived. When Musk later revealed he did not seek advice or talk to the Board prior to his tweet, it will not surprise investors that the company will not, in fact, privatize.
This is a negative development for shareholders. Not only is the stock around 25 percent below yearly highs but uncertainties over its ability to raise funds are growing. Had Tesla gone private, it would have enjoyed the freedom to set its milestones independently from the quarterly earnings calendar. Sale of debt instead of stock would have given the company whatever funds it required for covering capital expenditures.
As a publicly listed company, Tesla will now need to keep its investors happy quarterly. Raising funds through a share sale could dilute shareholders and put pressure on the stock. At a short float of 25.6%, bears would welcome any funding Tesla initiated.
Competition Heating Up
Tesla enjoyed a wide lead against other automobile companies, including Ford Motor Company (NYSE:F), Mercedes-Benz, and Jaguar. While Ford stock trades at yearly lows and rewards shareholders with a dividend yielding over 6%, Tesla stock is nearly flat for the year. Still, Jaguar’s I-Pace, an electric SUV, and Mercedes-Benz’ all-electric EQC could put some pressure on Tesla.
Realistically, BMW developed an EV line-up of models i3, i5, and i7, but Tesla did not feel much of a competitive pressure for its EVs. On its conference call, Musk said that drivers are trading up from a Honda Civic to a Model 3, with the willingness to spend more on a Tesla vehicle.
Looking ahead, Tesla is developing a Model Y, a pickup truck, a semi, and a next-generation bus. Bears may believe Tesla is spreading itself thin with those ambitions. Realistically, Tesla needs to solve its production issues with its Model 3. Until it figures out how to sustain output and increase supply over time, bears could have an edge in their bet against TSLA stock. Longer-term, though, Tesla’s goal is a profit margin of 25% on the Model 3.
Although it remains to be seen if bears will get to cash in on their bet against Tesla, buying stocks like Ford or General Motors Company (NYSE:GM) may end up just as badly. Traditional U.S. automotive manufacturers face higher raw material costs and lower demand, as the U.S. escalates its trading negotiations against China. As long as uncertainty persists in global trade, investing in Ford or GM is not a sure thing.
Takeaway on TSLA Stock
September’s markets will have more volatility as traders return from vacation. Any growing negative news related to the economy or higher uncertainties with Tesla will send the stock lower. Bears may increase their bets against the stock, putting more pressure on TSLA stock.
As of this writing, Chris was long F stock.