I wrote the following summary of the current state of TSLA for some friends who wanted my 2 cents last week. My apologies for the length, and feel free to shoot holes in anything stated.
Hello all,
There are several items occurring surrounding TSLA that another update is warranted. Let’s examine where we are, in order to have more clarity into the future.
Stock Price
The past year has not been kind to TSLA. There are 4 primary reasons that the price has taken a hit…here they are, and let’s examine each reason individually:
- Decline in oil prices will affect EV demand
- Short interest has increased
- Delay in Model X shows difficulty in production
- Cash flow extremely negative in 2015
Oil Price and Demand
The Model S was the best selling luxury vehicle in the U.S. in 2015. It outsold the BMW 7 series, Audi A7, and Mercedes S class. That was accomplished without advertising. The Model X has 30,000 reservations. The Model 3 will be revealed at the end of the month, with reservations beginning at that time. Although oil prices have affected overall demand for electric vehicles (EVs), Tesla has not seen demand affected whatsoever. Therefore, any decline in the stock price due to the lower oil prices is unwarranted in the medium term.
Short Interest
Since July of 2015, short interest in TSLA has increased
dramatically from 24 million shares to 34 million shares…over 30% of the float. (Source:
Tesla Motors, Inc. (TSLA) Short Interest) That equates to over $2 billion in additional short interest. Needless to say, that has put tremendous pressure on the stock price. I do not believe that short interest will go significantly higher (due to higher interest rates being charged for additional stock to be available to short), rather will revert to the mean in the relatively near future of around 27 million shares. Holding a short position in TSLA during the Model 3 reveal will be quite precarious.
Model X
The Model X is over-engineered. It is simply more complicated than it needed to be. This has caused significant delays in production, and also holds risk in possible recalls in the future. As a result of these delays, the stock has taken a hit due to fewer deliveries and cash burn. We are seeing movement, however, in deliveries over the past few weeks. Tesla has announced that they should achieve 1,000 deliveries per week sometime in Q2 of this year. Initial reviews of Model X have been overwhelmingly positive. If Tesla can stick to that schedule and avoid recalls, it would bode well for the stock price.
Cash Flow
A common bear argument against TSLA is how fast it is ‘burning through cash’. It has been cited that TSLA loses $19,000 per car sold (
http://www.newsmax.com/Finance/StreetTalk/SeekingAlpha-Tesla-Lose-Car-Sold/2015/11/03/id/700421/). When discussing this topic, it’s important to understand the difference between GAAP and non-GAAP accounting when it comes to TSLA. When Tesla leases a vehicle, it gets paid 100% for that vehicle immediately from the leasing company. It cannot report that income, however, because of the risk associated with the possibility of lower-than-expected residual value of that vehicle….they have to spread out the income over the life of the lease. Residual values are higher than expected, as the vehicles are holding their value very well. Using non-GAAP accounting allows TSLA to report 100% of that income immediately.
Tesla has also announced that it has closed a previous loan and opened an Asset-Backed Line of Credit (ABL). This is essentially a loan, with finished goods (i.e., cars in transit) as collateral. As more vehicles are in transit to customers, the ABL will grow as well. They have announced that with this ABL, they are cash flow positive right now. Critics say that this is fuzzy accounting and is simply more debt. But it is important to understand that
these vehicles have already been ordered. They are not merely being shipped to a dealer’s lot, which could sit for months. They are being shipped to customers that have ordered that particular vehicle. So essentially, the ABL pays Tesla for the car as it leaves the factory rather than when the customer pays for it. Being cash flow positive in 2016 with the ABL is a significant leap towards funding growth internally.
Secondly, Capital Expenditures (CapEx) have been significant during 2015. They have invested heavily in the Supercharger network, service centers, the Gigafactory, and tooling. These investments will give Tesla a huge advantage in the future if electric vehicles become commonplace. Furthermore, much of this CapEx spending on tooling has already occurred for the Model 3. Specifically, the paint shop and the stamp press line
already have the capacity of 500,000 cars per year. Most importantly, TSLA is predicting to be free cash flow positive by the end of the year. This is later than they previously predicted, but if they can fund their growth with revenue (rather than additional debt or secondary offerings) then this bear argument ceases to exist.
Model 3
On March 31st, Tesla will unveil the Model 3. A deposit of $1,000 is required to place a reservation. One item of note: the federal government gives a $7,500 tax credit for purchasing an EV, but only to the first 200,000 vehicles made by the same manufacturer in the U.S. This is important because Tesla has already sold approximately 50,000 vehicles in the U.S. so far, and should sell another 50,000 by the time Model 3 becomes available. That means that only the first 100,000 U.S. reservation holders should expect the rebate. My prediction is that we will see a mad rush during the first few days to place a reservation. 1 million reservations in 2016 is not unachievable, in my opinion. That would be the equivalent of a $1 billion loan, interest-free.
In summary, the stock price has been battered due to the false premise that demand for Tesla vehicles will shrink due to low oil prices, coupled with a dramatic increase in short positions. Tesla is in better shape financially than it has ever been. The Model 3 reveal, especially if they disclose the number of reservations in the days that follow, could give the stock price a real boost. There is not another stock, with revenue growing at 50% per year, that trades at just over 3x this year’s revenue (For comparison, Home Depot trades at 2x revenue: McDonald’s trades at over 4x revenue). It is true that if TSLA is just another auto manufacturer, then the stock is overpriced. But if TSLA is
anything other than that…if it is something different, something that we’ve never encountered…..then the stock is potentially wildly underpriced.
