Tesla Motors Inc (TSLA) stock has been a wobbly stock of late, in part because of the broader market’s declines, but also because investors are getting antsy about Tesla’s ambitious plans to pump out 500,000 cars in 2018.
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All told, Tesla stock is off almost 13% this year, with early May declines undoing the progress TSLA made ever since its February trench.
So it certainly didn’t need the set of headlines that are out today:
A hard-hitting investigative report from The Mercury News alleges that TSLA has been using low-cost foreign labor — “earning as little as $5 per hour” — to build out its manufacturing capacity at its plant in Fremont, California.
A worker from Eastern Europe, Gregor Lesnik, “plunged 30 feet to the factory floor,” and has filed a whistle-blower lawsuit in response. The Mercury News’ investigation says Tesla used cheap labor from Eastern Europe, found through contractors, that would be “in apparent violation of immigration and labor laws.”
From the Mercury News:
“Critics say the U.S. government hasn’t done enough to halt such arrangements, and has become an unwitting partner by allowing the workers to enter the country on a nonimmigrant visa for tourism and business, known as a B1/B2. Replacing U.S. workers with foreign visa holders for construction work is an improper use of the business visa, they say.”
TSLA shareholders weren’t immediately sweating this report, as Tesla stock was actually up fractionally at midday Monday.
But there could be repercussions.
Illegal immigration is a red-hot political issue right now, so this potentially could throw Tesla into the storm and result in some ugly PR. Considering Tesla is a company that prides itself on taking a New Age approach to business — one of its missions is to help deal with global warming — these practices can’t be too comforting to some customers who hold similar beliefs. (Especially since the cars carry premium prices to meet those ends.)
Domestic jobs are at the heart of the immigration debate. In Tesla’s case, the average pay for an American contract is $52 per hour — so saving 90% or so would certainly look good to an accountant, but maybe not to many citizens.
One can only imagine Donald Trump will sound off on this soon.
This also could rankle investors and regular Americans alike because TSLA has been the beneficiary of substantial government assistance, from grants to tax breaks. Plus, these alleged violations occurred in California, which is known for its onerous labor laws.
A sign that investors should take this seriously: the fact that CEO Elon Musk isn’t joking around. Musk tweeted in response to the news, “Only heard about this today. Sounds like the wrong thing happened on many levels. Will investigate and make it right.”
Bottom Line on Tesla Stock
This report, regardless of what comes of it, highlights a serious concern that all TSLA shareholders should be mindful of: the challenge of high-end manufacturing, which is a costly affair.
This situation is even more exacerbated amid Tesla ramping up its timeline by two years, saying it will achieve a production level of 500,000 cars by 2018 — likely in response to the heavy demand for Model 3 preorders.
Bank of America analyst John Murphy sees big-time risks, indicating that the cash burn in fiscal year 2016 will come to $1.6 billion. This likely will require another capital raise, which in turn will mean further dilution of Tesla stock.
And that might not even be the end of it, as Murphy thinks TSLA won’t be cash-flow-positive for at least three years.
In the meantime, competition isn’t going away — it’s strengthening. BMW, Mercedes, Audi, General Motors Company (GM) and others are bolstering their EV options to compete on both the high and low ends, so Tesla’s continued allure — while likely to persist — isn’t guaranteed.
And even with the recent drop in Tesla stock, valuation still is far from cheap, with the company trading at 65 times next year’s earnings. Compare that to still-growthy stocks like Alphabet Inc (GOOG, GOOGL), which trades at just 18x, and Facebook Inc (FB), which goes for 25x. These companies offer investors a way to play cutting-edge technologies, too — but with a much less risky profile.
This isn’t the doom signal for Tesla stock by any means, but it is a troubling development at a time at which the market isn’t exactly hoisting the company on its shoulders.
New money should wait out further news on this front, and likewise, current holders shouldn’t abandon ship yet.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also 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.