Despite the enthusiasm CEO Elon Musk has whipped up about Tesla Inc. (TSLA) and electric cars, investors must brace themselves for the possibility that the EV market pioneer will never reach profitability, according to several bears cited by Barron’s.
Despite the Silicon Valley auto maker’s rich $43 billion market value, Tesla, which went public nine years ago, is hemorrhaging losses and is yet to turn a profit on an annual basis. The company’s Model 3 sedan, its highly anticipated, first mass market vehicle, is far behind schedule and has seen costs soar.
- Shares down over 25% YTD
- Tesla raising billions to handle massive cash burn
- Bears skeptical of Musk’s shift to position Tesla’s long-term narrative as a mobility services provider
- Musk loads up on Tesla stock, owns 20% of outstanding shares
- After three consecutive quarters in the red, Tesla shoots for Q3 profit
Source: Investopedia, Barron’s
Tesla Shouldn't Bank on Robo-Taxis, Says Bear
While the S&P 500 has reached new highs in 2019, posting a stellar comeback after its worst annual performance in nearly a decade, Tesla has failed to join the rally. Shares are down over 26% year-to-date (YTD), compared to the broader index’s 15.3% return.
Meanwhile, Tesla has had to again turn to the debt markets as it scrambles to raise billions of dollars to cover its cash burn.
"Hyper-bears who were short Tesla shares on bankruptcy concerns may need to go back to their caves. But at the same time, however, some of the rational bulls may need to reassess the idea that Tesla will become a profitable auto [maker]," wrote Barclays analyst Brian Johnson in a recent note. He argues that press accounts of the conference call on May 2, which focused on fundraising, indicate that the high-profile CEO “sold” the deal based on the promise of autonomous robo-taxis by 2020. Johnson remains skeptical of Musk’s lack of emphasis on auto margins and pathway to profitability.
Due to the bond offering, he adds that, “Tesla’s cash balance is comfortably replenished for the next year or so. While we would not be surprised by continued positive momentum in the shares as bankruptcy concerns recede, we believe the appeal of Tesla shares to growth investors may fade.”
Instead of setting goals to boot margins and profits, Johnson is concerned that CEO Mush has signaled Tesla's plight by shifting his narrative of Tesla. The analyst sees Musk vision for Tesla pivoting from that of a growing, global mass-market auto manufacturer, to one of a mobility services provider operating a fleet of robo-taxis powered by self-driving technology, per Barron’s.
On Monday, an SEC filing revealed that Musk had purchased more than 100,000 additional shares of Tesla stock on May 2, boosting his ownership stake to approximately 20%.
Johnson, who rates Tesla at underweight, expects shares to decline near 22% over 12 months to reach a price forecast of $192. The average analyst surveyed by FactSet has a $303 price target on Tesla stock.
The Goods News
Not all are so downbeat. While Tesla’s driverless fleet has yet to hit the roads, Musk’s fans believe in the long-term story of the company serving as a transportation industry disruptor, rather than just a car maker. It wouldn’t be the first time that Musk has burned the bears, many who doubted that the company could even build an electric vehicle. In less than a decade, Tesla has seen its stock price soar more than 1,300% from its initial IPO price of $17 per share.
At an investor meeting last month, Musk reportedly used presentations regarding Tesla’s fundraising push to make the case that autonomous driving could send its valuation to $500 billion. That would represent a more than 1,000% increase in market value, and pit the company against deep-pocketed competitors like Uber Technologies Inc. and Alphabet Inc.’s (GOOGL) Waymo, which have doubled down on their self-driving car units.
After two consecutive quarters in the black, Tesla posted a loss in the first quarter of 2019. Investors will be keeping a close eye on whether Musk can deliver and Tesla can post end the third quarter of this year with positive earnings.