Tesla ($TSLA) recently dropped to a two-year low, dipping below $190/share earlier this week before settling at $190.63 at the close of the weekend May 24th, 2019. The company has lost nearly 40% of its value in 2019, while the S&P500 index is up 12% YTD [1].
Following Tesla’s cash problems, and several reports that the company’s cash flows can only sustain another 12-months at best, investors and traders have fled the company with expectations that the internal issues will continue to persist. Wall Street has heavily mixed feelings about this company as well. One Morgan Stanley analyst noted that the worst case scenario for Tesla is $10/share, while one analyst from Ark Invest said the bear price target is triple current levels, at $560 per share, and a bull case of $4000 per share, within 5-years [2]. So let’s call a spade a spade: Wall Street has no idea where Tesla will go from here. To be honest, I don’t think anyone knows the future of this company, not even Elon Musk, despite the visionary he is.
Tesla has had an interesting year, to say the least. Let’s do a quick recap.
TESLA MOMENTS 2018-2019 [3]:
- January 2018: Tesla predicts to produce 5,000 Model 3 sedans per week. Instead, 2,435 Model 3 sedans were produced in a three-month span.
- July 2018: Tesla finally surpasses the production goal of 5,000 Model 3 sedans per week.
- August 7, 2018: Stock soars 10% after Elon Musk tweets. Musk later backs out of plans to take Tesla private.
- September 28, 2018: SEC sues CEO Elon Musk after August 7th tweet for “false and misleading” statements. Musk settles with SEC for $20 million and steps down as chairman of Tesla.
- December 31, 2018: US government no longer offers a tax credit of $7,500 for electric cars.
- January 2, 2019: Tesla announced it will cut 7% of the full-time workforce. Happy New Year!
- February 26, 2019: Musk Tweets again!
- March 1, 2019: Tesla Model 3 is now $35,000
- March 14, 2019: Model Y SUV is unveiled for a mass market price point. Tesla expects Model Y to be its best selling model, more than Model 3.
- May 24, 2019: Tesla stock falls below $190/share following two weeks of disastrous trading.
Q1 2019 EARNINGS [4]
With the $7,500 US tax credit for electric vehicles (EV) cut in half, a substantial driver of demand for Tesla vehicle revenue was now gone. Tesla released their Q1 2019 earnings release earlier this year in April, and it was reported that vehicle sales were reported at $6.32 billion, down 41% from the end of 2018. Buyers sped up demand in the last few months of 2018 to push up car revenues in anticipation of the federal tax credit cut.
Revenue only reached $4.54 billion, missing the $5.19 billion expected. EPS Losses also put a punch to Tesla’s report. Reported losses came in on an adjusted basis of $2.90 per share, versus 69 cents expected by analysts.
FUNDING FINALLY SECURED?
On May 3rd, it was reported that Tesla completed a $2.35 billion stock and bond sale to raise capital to continue company operations following the $700 million Q1 loss [5]. It was reported that Elon Musk, already the largest Tesla shareholder, plans to buy $10 million of the new stock offering, which later updated to up to $25 million.
The raising of capital proved to show some optimism for investors and stakeholders of Tesla, following Musk’s “funding secured” Tweet last year, and where he then hinted that Saudi Arabia’s fund was pushing Tesla to go private and would be a potential partner for the aforementioned secured funding.
“Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private…Recently, after the Saudi fund bought almost 5 percent of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. … I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed.” – Elon Musk [6] Blog Post
TIME TO BUY?: SHANGHAI MEGA FACTORY, AND THE FUTURE OF TESLA
Look. The fundamentals of Tesla, as a company, do not and have never looked good. They are not profitable. Losses are still huge ($700 million Q1). Elon Musk is visionary but still highly unpredictable. There is wavering fear that Musk may divert his passions towards his other companies, like The Boring Company, SpaceX and Mars, or his flamethrowers.
The stock is trading at $190 and who knows where it will go when the markets open again on Tuesday, May 28th following the three-day Memorial long weekend. Will the selling continue? Or will buyers flock to the stock, seeing its discounted price from $380 just back in December?
If you were interested in Tesla stock before but weren’t ready to put money in yet, then this might be a good opportunity now, given how much cheaper the stock is trading at.
Although Tesla’s fundamentals don’t look too great, there is a big X-factor on its way, and that is the Shanghai GigaFactory 3 currently being built in China [7]. The factory will produce battery cells, Tesla Model 3, and the new Tesla Model Y cars at an initially expected production rate target of 250,000 EVs per year.
This factory will undoubtedly reduce the costs of production and also amp up production and hopefully fulfill any Chinese demand. If you look at it from a China perspective, you’d have to think that most rational Chinese people who are genuinely interested in a Tesla vehicle has deferred purchasing one until this Shanghai factory is complete, where the price of a Tesla will be much cheaper than buying one from America and having it shipped abroad. On this basis, in 6-12 months, you’d hope that the Shanghai Tesla Factory will push revenues significantly higher with exposure in the China markets.
If Tesla can continue operating for the long-term, and turn profitable with help from China exposure, there is no doubt that there is a huge potential upside for the stock. Not to mention that right now, Tesla has historically been the most shorted stock. However, if Tesla shares can climb back up, the shorts will have to be covered and will push the price even higher.
Please remember though that Tesla stock is a speculation stock.
And with speculation, there is always a belief component.
And my belief is that in 20-years, people will look back to 2019 and laugh and say “I can’t believe some people were betting against Musk.”
The real question here, though, is if Musk’s heart is fully in Tesla, or in Mars. And for the sake of Tesla shareholders, let’s hope that Musk continues to steer the wheel
Check out more company stock analysis on the Stocks Page
Sources
[1] Tesla YTD 2019 Stock Returns Chart
[2] Wall Street Misunderstands Tesla
[3] Tesla Historical Business Timeline (From 2003-2019)
[5] Tesla Raises $2.7 billion through stock and bond sale
[6] Elon Musk Blog Post on Taking Tesla Private
[7] Shanghai Gigafactory 3 Wiki Page
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