Tesla Inc (NASDAQ:TSLA) stock has always been volatile. But since late February, the drop in TSLA shares has been particularly gut-wrenching. Tesla stock has plunged from $357 to $274. The irony is that old-line operators like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) have been better investments!
But perhaps there is value now with Tesla stock? Maybe Wall Street has overreacted? Well, for the most part, I actually think the reaction has not been tough enough.
The fact is that TSLA stock faces considerable headwinds. Even worse, it’s tough to get a sense of the ultimate impact of them.
Just take a look at the following:
Debt: The auto industry is capital intensive. This is why most startups ultimately fail. Simply put, they just run out of money.
As for Tesla, Musk has been a maestro with raising capital. It certainly helps that he is wicked smart and has a tremendous track record, as he has created breakout companies like Paypal Holdings Inc (NASDAQ:PYPL) and SpaceX.
But Tesla now has a major slug of debt on the balance sheet and this is starting to worry the rating agencies. Recently, Moody’s Investors Service downgraded the bonds to junk status. The firm also believes that the company will need to raise $2 billion this year.
Recall: Tesla has instituted a voluntary recall of 123,000 Model S’s because of issues with the power steering. This will not only be a major expense but a distraction.
SolarCity: This is Tesla’s solar panel installer. Unfortunately, last year this division sustained the largest declines in the industry, with megawatt deployments off by 38%.
Autopilot: This is Tesla’s semi-autonomous system and it has been under much scrutiny lately. For example, in late March, a Model X was involved in a collision with a highway barrier that resulted in the death of the driver (at the time, the Autopilot feature was activated). The National Transportation Safety Board has launched a probe of the incident and also has noted that it was “unhappy with the release of investigative information by Tesla.”
One of the concerns is that Autopilot creates a false sense of security. What’s more, if Tesla ultimately winds up taking this system off the market, it could make its cars less appealing. It may also mean that rivals will get a competitive edge with self-driving technologies.
Production And the Tesla Stock Price
I think the biggest issue with Tesla stock is the production of the Model 3 — or lack thereof. Musk has made various boasts about his goals and he has fallen short on all of them. But interestingly enough, Wall Street is still giving him the benefit of the doubt. Yes, it’s a head-scratcher.
On Tuesday, the company announced that production for the past week was 2,020 Model 3s. But then again, the forecast had called for 2,500.
Now it’s true that TSLA says it will get back on track and that there will be no need for an equity raise this year. But hey, haven’t we heard this kind of optimistic talk many times? Of course.
So I would take all this with a big grain of salt. It’s also important to keep in mind that the Model 3 is critical for the company’s cash flows. It’s also critical for its strategy to become a mainstream automaker.
In other words, if the production continues to remain lackluster, there is likely to be more problems for Tesla stock. Besides, in the meantime, customers may look elsewhere for electric vehicles. So in light of all this — including the other issues with debt, problems with Autopilot and the fall-off of SolarCity — it seems like the bear case is far from over.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
