Tesla, Inc. is one of the most enthusiastically followed stocks on Wall Street, but the firm’s future isn’t held in the same regard by everyone. Though there are good arguments about the massive growth to be expected from the firm, anyone trying to value the company more traditionally is skeptical.
The question is whether or not those Wall Street voices are right. As the market shakes and looks to be turning a bearish, it’s time for those holding Tesla stock to take a look at the arguments from the other side. The Tesla bears are beginning to sing in a chorus, and being wrong on this call could be a very expensive decision.
Tesla, Inc. bears make a strong argument
A very strong argument on the subject of Tesla stock emerged from David Rocker, a retired hedge fund manager. He wrote an article in Barron’s which called into question the entire valuation myth around the firm. He reckons Elon Musks car maker is is “becoming the loudest canary in Wall Street’s coal mine.”
The big issue, for Rocker, is the way that Elon Musk and Tesla deal with Wall Street. To say that the firm’s dealings with investors are unconventional is generous. He points out the firm’s emphasis of non-GAAP measures of earnings, something Wall Street appears to endorse, and its strange way of calculating gross margin.
Also up for criticism are the firm’s standards when it comes to gross margin and vehicle sales. Tesla tends to offer less information than traditional auto makers on both of these fronts. Rocker says that the unorthodoxy makes comparisons meaningless. Both of these problems are failures of Wall Street, in his view.
In his harsh conclusion, Rocker writes:
“Musk has been hailed as a modern-day Edison, but perhaps a better comparison is Nikola Tesla, the company’s namesake. He, too, was a brilliant scientist and prominent showman who had many great ideas, but none became profitable for him”.
That’s a tough, if overly metaphorical, rebuke of those on Wall Street who think Tesla can defy gravity forever.
Drilling deeper with the Tesla bears
Rocker is particularly interested in the Tesla reliance on subsidies. In fact he makes the argument that there is a link between those subsidies, the low interest rate environment we’re in and the firm’s success. Possibly the most insightful segment of the article was the following:
“Tesla claims to have more than 400,000 deposits for the Model 3, but these aren’t orders. They reflect a decision by potential buyers to get in line for a $7,500 tax credit at virtually no cost. Shifting $1,000 from a savings account into a refundable Tesla deposit costs only about $1 per year in lost interest.”
This suggests that Tesla could lose deposits massively once one of two things happen: an interest rate increase, or a decline in the value of the subsidies. Right now it seems as if the Federal tax credit will not be renewed. Assuming that doesn’t change, the subsidy is likely to start to be shut down in the second half of next year. After that it will be phased out on a quarterly basis.
If Tesla is truly reliant on government intervention to keep itself afloat, as standard economic theory seems to suggest, then the firm will need to change its strategy very soon. Those who are big fans of the firm reckon that every single car that gets on the road will increase demand. That’s the sort of magical thinking that Rocker seems to be arguing against, but it doesn’t mean he’s wrong.
Can Tesla hold on?
Tesla, Inc. isn’t really doing a whole lot to break this mythos. The firm is moving ahead with the release of the Model 3. At the same time, however, it’s beginning to talk about the electric semi. The truck, which is rumored to have 200 to 300 miles in range, is due to be unveiled this September.
The key bear insight into Elon Musk’s company is based on actions like that. When it’s expected to deliver, Tesla moves the goal posts. No, the firm says, we’re not going to make a profit this year. Instead we’re going to invest all of our money in this new project. Those who love the firm reckon it should try to catch the future before someone else does.
Tesla bears, by and large, see this as pants-seat flying. It’s simply an attempt to make it seem as if there’s big earnings potential worth waiting for. The firm has, to date, not made a cent in earnings for its shareholders. In fact it has burned more than $7 billion in cash since going public.
Elon Musk and CFO Deepak Ahuja are promising the firm will make a profit with the release of the Tesla Model 3. With so many other projects in the pipeline, however, that may fall by the wayside yet again. Whether or not we get free cash flow generation with the release of the Tesla Model 3 may be the real canary in the coal mine.
Most analysts still think Tesla is solid
Mr. Rocker sees reflections of the dot com bubble in Tesla stock. In his view, the firm’s future is built on dreams rather than real analysis. The article, in theme at least, is a response to a report from Adam Jonas of Morgan Stanley. In a recent analysis of Tesla stock, the analyst increased his price target on the firm while cutting its earnings potential.
It is exactly this kind of stunning, willful “disruption” of the pillars of investing that irk people like Rocker. Investors have put billions behind Elon Musk in the hope that he can successfully make multiple technological breakthroughs. At the same time they’re betting that it can execute on its strategy perfectly.
Most of Wall Street seems to be betting on Elon Musk to get there, or at least to be given enough chances that it will eventually succeed. The oft repeated fact that the EV maker is the most valuable car firm in America bears repeating, however. How is it that such a company could be worth more than international behemoth Ford Motor Company?
That’s the question that the bears are asking, and one that bulls need to answer for themselves.
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