By Adil Yousuf
Sketchy finances, abysmal profitability, and a cash burning machine – this summarizes Tesla Motors’s (TSLA) journey on Wall Street to date. The company has a track record of overpromising and under-delivering and has yet to report a positive quarter for its investors.
Tesla has been racking up losses and burning through cash so quickly that it was forced to issue a secondary stock offering in the hopes of drumming up a rescue operation. To further add to the woes this year, the company reported yet another negative quarter. Tesla reported a Q4 loss of roughly $75 million or 65 cents per share, wider than analyst expectations of a loss of 53 cents per share. Sales, however, came in slightly ahead of estimates ($306 million vs. $298 million), but that wasn’t enough to keep shares from sinking 9% on February 21 20131.
Based on Market IQ’s fundamental metrics the company is bleeding red ink across the board. Tesla is the worst performer in its peer group as seen on the Quality-Value chart below.
TSLA’s fundamental stock Quality is worse than 78% of its peers. The dismal Quality numbers are mainly a result of the company’s negative operating income, negative growth, and declining cash flow.
Valuation parameters suggest that the firm is overpriced – with no positive realized earnings; a price to book (P/B) value of 48.31 seems astronomically high. This effectively makes investment in Tesla a pure visionary play – may be some day the company makes enough money to justify these numbers.
If an unprofitable business and an almost-absurd valuation aren’t enough to scare investors away, the company’s credit raises major red flags. The company is carrying a huge amount of debt on its balance sheet which includes a large sum from federal loans2.
In spite of all the negativity, shares are up approximately 30% over the last four months. Mainly due to the re-election of President Obama, implying it’s quite likely the company will maintain access to the loans that have kept it afloat. In addition to these direct loans the firm also enjoys other federal and provincial tax benefits3.
However, investors won’t remain oblivious to the mess the company is in forever and it may not be long before they pull out if things continue going south. Is Tesla too ahead of its time? Perhaps at some stage, electric motors will take over from the internal combustion engine, but that day still seems distant until some barriers are overcome. First, electric cars must provide a comparable range to conventional cars of a similar price. Second, there has to be a way for batteries to be recharged conveniently and rapidly (Nikola Tesla’s vision). This is by no means trivial: a massive infrastructure has to be put in place to make this concept work.
If one is to jump into Tesla's stock, it is a leap of faith – at the company level, and at the industry level. For now, only one question remains unanswered: Can Tesla make enough money to live up to the hype or at least sustain its business model in the short term?
- The company has received a $465 million loan from the Federal Reserve.
- Tesla benefits from a federal tax credit for electric car buyers of up to $7,500. Moreover, the state of California - home to US’s largest car market - offers a $2,500 rebate.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.