Tesla Inc is the king of disruptive technologies, or so Wall Street would have you believe. CEO Elon Musk is apparently on the verge of changing the world almost every single day, though investors don’t have that much to show for it.
On Tuesday we heard that the man leading the firm’s battery development segment is getting out of Fremont. It’s almost impossible to know what’s going on in the firm and what effect such a departure could have its firm’s future.
With earnings on the way on Tuesday afternoon, now might be the time for those holding Tesla stock to rethink their strategy. It’s certainly not the time for panic, but it is a healthy moment for reflection on valuation models.
Tesla battery charge gets delayed
Kurt Kelty had been with Tesla since 2006. That made him one of the longest serving members of the Tesla executive team before he departed the firm.
According to a statement from the firm he “left the company to explore new opportunities.” His responsibilities are going to be “distributed” among other team members.
Kelty is one of multiple Tesla executives who have chosen to leave the company in recent months, but his position is more important than most to Wall Streets idea of the future for Tesla stock.
We don’t know how the Tesla Inc battery project is coming along at this stage. The firm has promised to improve energy storage tech on two fronts. It’s going to increase energy density and reduce energy costs.
We don’t have any good numbers on how far the firm has gotten down either of these paths with the Model 3 battery pack. Because of that, it’s impossible to assess Kelty’s contribution. He was decisive in getting the Gigafactory up and running. Now that it is humming along, it’s not clear what effect his departure will have.
With the head of the battery department gone, perhaps it’s time to change your Tesla stock model. If your original idea was “disruption,” based on battery tech, that reassessment is absolutely necessary.
Why disruption isn’t good
Prices and profits work as more than just incentives in the market place. They’re also information. That’s really important when investors are trying to assess a company’s future. If it’s not profitable, there should be a very good reason investors are buying in. In those terms, the Tesla argument seems pretty thin heading into earnings.
Over at Vox on Tuesday Bret Goldfarb, associate professor of management and entrepreneurship at the University of Maryland’s Robert H. Smith School of Business, explained the case against Tesla disruption, and the validity of disruption based stock valuation in general.
We’re not going to repeat the argument in full here, but if you’re a Tesla stock holder it’s a good idea to take a look. The key ideas are simple and straightforward.
Tesla Inc is a firm that needs a lot more funding to reach its lofty expansion goals. Its value is based on ideas that it can disrupt technologically at least one of a number of difficult areas. In order to secure margins it needs to keep way ahead of competitors.
That’s the thesis that massive valuations for Tesla are based on. All you need to do is fill in the blanks on technology. The problem is, of course, that it’s impossible to predict when and where technological breakthroughs will occur.
Technological breakthroughs can’t be predicted
They’re pretty sure it has something to do with level of investment, but even that relationship isn’t so clear. It might also have something to do with a firm’s business model according to a recent paper from Charles Baden-Fuller and Stefan Haefliger.
Without going into more detail on the academic void, you should know that believing a single firm will be the source of a specific technological breakthrough is a very risky way to invest your money. Disruption theory is fun to play with, but it’s really quite bad at predicting market outcomes.
Wall Street needs to feed Tesla stock
Wall Street has been keeping up its end of the bargain thus far. Tesla Inc has gotten billions from equity and debt in order to bring its Model 3 to market. It’s true that Tesla stock may be one of the most direct ways to bet on some of these technological breakthroughs.
Other firms working on self driving include Uber, Alphabet Inc and Intel Corporation and almost every large automaker. They are either private or have their self-driving divisions buried deep behind much larger businesses.
That makes investing in self-driving through them a lot more sticky. Elon Musk doesn’t have much of a business without self-driving, so Tesla is more like a pure play.
On Wednesday evening we’re likely to hear a good bit about Elon Musk’s cash pile. If the firm burned through more money than expected in the three months through June, Wall Street may forecast a return to capital markets sooner rather than later. Because of stock dilution and increasing debt, that could be a negative for shares.
The company needs cash, however, and if it doesn’t get it it’s going to have to stop making cars. It can either get that cash by turning a considerable profit this year or going back to Wall Street.
The question is whether Wall Street, a toponym that includes everyone from Warren Buffet to the $100-a-month investor, will be willing to pour more money into Tesla on a disruption play that still isn’t generating cash.
Tesla earnings incoming: Rethink your bet
Why are you betting on Tesla stock? Is it because you believe this firm is going to develop self driving ahead of all others? Do you think Tesla will have an “near monopolistic” lead in the EV world, as predicted by Alexander Haissl of Berenberg Bank? Do you really think solar and batteries are a high margin business heading forward?
Before the dramatic moment when Tesla Inc tells us how much cash it lost in the three months through June, these are questions you should answer about your Tesla stock.
If you have some model that shows Tesla has a chance to succeed, then nobody is likely to convince you otherwise. If you’re relying on “disruption,” however, remember that it’s just about impossible to predict.
We’ll be covering the earnings live as they come in. By consensus Wall Street is expecting a loss of around $1.82 per share. Sales are forecast to come in at $2.51 billion by consensus. The big number will be cash burn, of course.
David Einhorn, of Greenlight Capital, says that this afternoon’s cash burn will test investor mettle. He’s shorting the company, however, so it’s not the best idea to take his word as gospel.
The bottom line is that Tesla stock is a major risk for almost everyone holding it. Unless its part of a diversified bet on broad tech disruption, it’s a bet on world beater Elon Musk. If you’re comfortable with that sort of threat to your savings, you could be a big winner in the years ahead. There’s always a chance, of course, that the Apple Inc. car finally arrives in 2020.