Is Tesla (TSLA) Trying to Grow Too Quickly? Former GE Exec Thinks So
Tesla TSLA has had a rough 2019 as it tries to expand production, with its stock price down 32.8%. Former GE GE Vice Chair Beth Comstock sympathized this week with CEO Elon Musk’s financial worries saying, “Getting to scale, getting your logistics organized in these fast-growing companies is really hard.”
Most of Tesla’s stock price troubles came from abysmal Q1 earnings and production numbers. The company produced just 63,000 vehicles, with 10,600 still in transit at the end of the quarter. This was a 31% decrease in production and a 5.6x increase in cars in transit from the previous quarter. All of this resulted in a loss of $702 million in Q1.
In February, Consumer Reports announced that it would remove its “recommended” rating from the Tesla Model 3. Thereby leaving no Tesla vehicles on its recommended list. Consumer Reports dropped the Model 3 because of a long list of customer-cited quality concerns, which included software glitches, ill-fitting body panels, and defective glass.
Last week, Tesla’s VP of Production, Peter Hochholdinger, left the company. This came as a shock and shook investor confidence since Tesla is currently in the midst of rapid production capacity growth. Hochholdinger’s departure is the latest in a series of executive exodus. Tesla VP of interior & exterior engineering Steve MacManus left last week as well. There have now been 11 high-level departures so far in 2019.
Meanwhile, some, like Bernstein analyst Toni Sacconaghi, have suggested that Tesla is in a working capital bind. Estimates show that Tesla’s large number of vehicles in transit at the end of Q1 could have put strain on net working capital of $800 million.
Musk himself was also famously in trouble with the SEC after he tweeted about possibly taking the company private, which impacted share prices. The SEC and Musk settled out of court, with Musk agreeing to a $20 million fine and to step down as chairman of Tesla’s board.
Musk’s Day Dreams?
After Q1’s disappointing performance, Musk projected 90,000-100,000 cars delivered in Q2. This would mark a 43-59% increase in production in just one quarter. Tesla did deliver 90,700 vehicles in Q4 2018. If production lines can get back to late last year’s levels, it is feasible to meet this goal. If Tesla does meet its delivery goal, shares are likely to jump significantly.
However, the U.S. tax credits provided to customers who buy electric cars are set to expire, which could significantly decrease consumer incentive to buy these cars. The tax credit was cut from $7,500 to $3,750 on January 1 and was cut in half again on July 1st to $1,875. The tax credit will expire completely for 2020.
During this year, Tesla is set to launch production at its first Chinese factory to keep up with the largest electric vehicle market on the planet. Tesla also claims to be deciding on a location for its first European factory later this year and will start to sell in India next year.
Tesla also has plans to announce an electric consumer pickup later this summer. This car could sell very well and break into the 2+ million vehicle per year pickup truck market. But it could overcomplicate production as the EV marker tries to ramp up its vital Model 3 output.
Tesla is an extremely innovative and much talked about company. But it is clearly not without faults. The product quality issues, corporate instability, and subpar production numbers are enough to make many investors nervous.
On top of this, Tesla stock has underperformed the market by 49.7% in 2019. The Zacks Consensus Estimate shows Tesla with a projected -1.16 EPS for 2019, which is a significant loss for a 16-year-old company. Tesla currently holds a Zacks Rank #3 (Hold), but this is a recent upgrade from its #4 (Sell) earlier this month.
Jim Chanos, founder of the world’s largest short-selling hedge fund and a large bear on Tesla, believes that Tesla will never reach its goals. He has stated that investors tend to treat TSLA like a tech company, when in reality it has to learn the lessons that Detroit automakers learned 100 years ago. The biggest reason to bet against Tesla, Chanos argues, is that the company is not actually a leader in electric and autonomous cars.
With other automakers moving into the electric vehicle segment, Tesla will be hard pressed to stay on top. Competitor Volkswagen VWAGY has 8 fully electric cars coming before 2022 in its “I.D” line while Ford F has almost a dozen full-electric and plug-in hybrid vehicles in development and on the market. Tesla will also have to compete with the myriad of electric vehicle startups like Lucid Motors, Rimac, Rivian, and SF Motors, that have sprung up in recent years.
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