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Tesla Motors Inc (TSLA)’s Cash Drain Shows no Signs of Slowing

Tesla Model 3 (TSLA)

Tesla Motors Inc CEO Elon Musk’s escalating promises do not look so believable now, given the fact that the electric carmaker is running out of cash quickly. Also, the electric carmaker faces strong competition from other automakers, and its current valuation is composed of extreme optimism. There are several issues with the stock, making it apt for shorting. A report from ValueWalk discusses such issues.

Tesla not giving true picture

Tesla Motors Inc has never been profitable, when it comes to true profits. Tesla’s economic earnings have dropped to -$1.4bn in 2015 from -$195m in 2010. In the past twelve months, the earnings declined to -$1.7bn. Despite revenue growing 103% compounded annually from 2010-2015, there is a rapid fall in economic earnings. In addition, Tesla’s after-tax profit (NOPAT) margin has declined to -18% TTM from -2% in 2013, the report notes.

Tesla Motors Inc. (TSLA) Store in Southern California

Tesla’s non-GAAP metrics overstates the real condition of the company largely. Despite economic earnings reaching -$1.4bn in 2015, the automaker reported a non-GAAP loss of -$294m in the same year.

While calculating the non-GAAP net income, the electric carmaker eliminated $198m – around 5% of revenue – in stock-based compensation expense in 2015. Additionally, it has $3.3bn as employee stock option liability. “If Tesla were in a decent financial position, it wouldn’t have to rely on stock options to pay its employees,” the report notes.

Rising capital needs

Making a car company from scratch takes up a lot of capital, but Tesla’s cash drain shows no such signs of slowing as the company grows. The automaker has spent around $7.4bn in cash since 2011. And, more importantly, the rate of spending money is increasing quickly.

Investment banks and Wall Street like cash burn because it means profits for them when the automaker raises more capital. It would be Tesla’s seventh capital raise since 2012, if the electric carmaker raises capital again. It has raised more than $6.5bn in these issuances. So seeing positive ratings on the automaker from the Wall Street analysis should not come as a shock, the report notes.

Also, there are questions over Tesla and SolarCity merger. Jim Chanos – noted short-seller – called the acquisition “a shameful example of corporate governance at its worst.” There is a significant overlap between the board members and executives of SolarCity and Tesla, apart from the astonishing misallocation of capital.

Buying SolarCity will not only allow Musk to save the clean-energy giant from the risk of bankruptcy, but also help several executives along the way, the report notes.

Intense completion ahead

Another issue for Tesla Motors Inc is the rising competition. General Motors is planning to introduce an electric vehicle. Nearly all big automakers are either planning to make electric cars, like BMW i3, Chevrolet Volt, Audi A-3 e-tron, the Toyota Prius, Volkswagen e-Golf, Nissan LEAF, and Ford Fusion Energi, or have plans to do it in the future.

The crux is, the stock remains overvalued even if one chooses to ignore the large amounts of capital required to hike up production of the Model 3, the cash burn and increasing competition. Expecting the automaker to grow revenues while achieving margins equivalent to some of the major carmaker worldwide seems too optimistic for now. However, the automaker might achieve one of the two, and not both.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.