Tesla stock soared for a few months starting in February following news that pre-orders for the electric-car maker’s Model 3, with a price tag of $35,000, were approaching 400,000 units.
But, as well-known short seller Jim Chanos so perfectly put it in an interview with CNBC: “We have all kinds of questions on the profitability of the business.”
First, the Model 3. This was Tesla’s play for an “affordable” electric car but it appears to be affordable for everyone EXCEPT Tesla.
Tesla loses more than $4,000 on each of its high-end Model S electric sedans; and that model’s cost is between $70 and $108k. With margins like that, one has to assume a $35k Model 3 can’t be the answer to solving Tesla’s red ink.
Tesla’s income statement reveals the company is hemorrhaging cash at a robust clip. Furthermore, according to TheStreet Ratings, they have a net profit margin of -26.38 percent and a quick ratio of 0.49, which means they have 49 cents in available cash to pay every $1 of current liabilities.
Worse than its lousy earnings and cash flow, Tesla is grossly overvalued compared to its peers. Tesla’s market cap is more than $30 billion, compared to Fiat Chrysler at around $10 billion and Ferrari at around $8 billion. Being valued at 3x more than FCAU — an established and profitable company — looks especially absurd when considering FCAU produces annual sales of over $130 billion, while Tesla produces revenue of only $4 billion.
Furthermore, Tesla’s market cap is nearly two-thirds of General Motors‘ market cap. This is despite the fact that General Motors has a history of selling 10 million cars at a profit each year and Tesla sold less than 100,000 cars last year at a loss. They would have to sell 6.6 million cars this year to justify its current valuation. With less than 400,000 cars on pre-order that doesn’t appear likely anytime soon.
In a February interview with CNBC’s Squawk Box, Former GM executive Bob Lutz noted that, “[TSLA] costs have always been higher than their revenue…They always have to get more capital. Then they burn through it.”
First, he pointed out that, on the back of falling oil prices, demand for electric vehicles (EVs) is slowing. Second, there is growing competition that will cut into Tesla’s margins as prices for EVs fall. Tesla has a lot of competition over the next few years. The industry is already awaiting the Apple car with bated breath that is set to launch in four years. And GM’s Chevy Bolt is similarly priced with a similar range and is set to come out this year. And then we have the Nissan Leaf expected to more competitive in the coming months and years. And add to that first generation vehicles like the BMW i3.
And in China, they have the EV Company LeEco, which recently unveiled its very first electric car that includes self-driving and self-parking capability using voice commands via a mobile app. Besides LeEco, there is another Chinese EV auto maker that sold more electric cars last year than Tesla, Nissan or GM, it’s called BYD Co. and is now targeting the U.S. market.
Lutz believes that competition from industry heavyweights like these could “kill” Tesla in the future.
“The major OEMs like GM, Ford, Toyota, Volkswagen, etc … they have to build electric cars, a certain number, in order to satisfy the requirements in about half of the states. Those have to be jammed into the marketplace, otherwise they can no longer sell SUVs and full-size pickups and the stuff that they really make money on. So that is going to generically depress the prices of electric vehicles,” Lutz warned.
Lutz also explained that companies such as General Motors will not be making any money on their “Tesla killer.” They are making these vehicles to appease Washington.
“The majors are going to accept the losses on the electric vehicles as a necessary cost of doing business in order to sell the big gasoline stuff that people really want. Well, Tesla does not have that option,” Lutz said.
But Musk has a strategy for driving down the cost of his electric car that hinges on achieving economies of scale, bringing down the production cost of the battery pack by 30 percent. This hinges on the success of their future Nevada home called the “Gigafactory.”
The Gigafactory is a one-stop shopping in battery-pack production. The company currently buys battery packs through a deal with Panasonicand has partnered with Panasonic in this venture. Production volume at the Gigafactory is anticipated to be the equivalent of over 30 gigawatt-hours per year; this would mean the Gigafactory would produce more storage than all the lithium battery factories in the world combined. The $5 billion dollar plant is as big as the Pentagon Tesla, and Tesla is hoping to produce 500,000 lithium ion batteries annually.
Musk recently laid out his Energy-branded battery ambition in rock star glory. At the event spectacle, Musk declared that his batteries would someday render the world’s energy grid obsolete. “We are talking about trying to change the fundamental energy infrastructure of the world,” he said.
Musk envisions his affordable, clean energy will one day power the remote villages of underdeveloped countries as well as allowing the average homeowner in industrial nations to go off the grid.
But before you sever your ties with your electrical company, it’s worth noting that not everyone thinks Musk’s plans are achievable – at least not in the time frame he envisions.
Panasonic, the supplier of the lithium-ion cells that form the foundation of Tesla’s batteries, and partner on the company’s forthcoming battery factory — calls Musk’s claims a lot of hyperbole.
“We are at the very beginning in energy storage in general,” said Phil Hermann, chief energy engineer at Panasonic Eco Solutions. “Most of the projects currently going on are either demo projects or learning experiences for the utilities. There is very little direct commercial stuff going on. Elon Musk is out there saying you can do things now that the rest of us are hearing and going, ‘really?’ We wish we could, but it’s not really possible yet.”
And far from the grand stage with little fanfare buried in their November 10Q Tesla also sought to tamper investor’s expectations: “Given the size and complexity of this undertaking, the cost of building and operating the Gigafactory could exceed our current expectations, we may have difficulty signing up additional partners, and the Gigafactory may take longer to bring online than we anticipate.”
With a company saddled with debt and cash-strapped, who is going to shoulder the burden of a delay in the Gigafactory realizing its full potential? That would be shareholders through stock dilution or the American tax payer – but most likely a combination of both. There are those who believe that Musk’s real genius is in following government subsidies.
Tesla’s model relies strongly on a “green” administration. According to the Los Angeles Times, all of Musk’s ventures: Tesla Motors, SolarCityand Space Exploration Technologies, known as SpaceX, together have benefited from an estimated $4.9 billion in government support. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups.
The promise is that the Tesla stockholders and the tax subsidizing public will greatly benefit from major pollution reductions as electric cars break through as viable alternative and gain access to mass-market production.
And frankly, I’m not convinced that electric cars are even good for the environment. First, it’s important to note that at this time, these cars don’t power themselves — they are plugged into an outlet in your garage that connects to an electric power plant. Second, there are a lot of environmental questions about the lithium battery itself. In a 2012 study titled “Science for Environment Policy” published by the European Union, a comparison was made of the lithium ion batteries to other types of batteries available such as; lead-acid, nickel-cadmium, nickel-metal-hydride and sodium Sulphur. They concluded that the lithium ion batteries have the largest impact on metal depletion, making recycling more complicated.
Musk may be a genius and a visionary but the truth is that Tesla has an unproven business model and a stock that is massively overpriced. Even if some year in the distant future there exists the charging infrastructure and pricing available to make electric vehicles conducive to supplant the internal combustion engine, Tesla faces an onslaught of competition that will most likely drive its profit margins further into the red for years to come.
So, as far as I’m concerned, the stock is not a buy — no matter what earnings say. The math just doesn’t add up.
Disclosure: Neither Michael Pento nor the firm own any positions in Tesla stock. However, several Pento clients own puts on Tesla.