Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Tesla Cash Keeps Burning at $320 a Share

Companies / Corporate Earnings Feb 15, 2018 - 03:12 PM GMT

By: EconMatters

Companies

Financial markets are off to a good start today trying to stabilize after the worst week in two years for American equities. The tumultuous move in equities last week wiped $2 trillion from US. Tesla Inc. (TSLA) stock performance also took a beating at its worst week since July. The stock is trading around $316 at this writing, up 15% in the past 12 months. That compares with gains of 13% for the S&P 500 SPX, 20% for the Dow Jones Industrial Average (DJIA).



The Auto Industry, Tesla & EV 

According to the latest sales data, the US auto industry has cooled off considerably with Americans keeping vehicles longer or purchasing lower-mileage used cars instead of new ones. Auto dealers have reduced prices and extended loans to 72 months or more to move inventory, but there is still an oversupply of new cars in the market. Crossovers, sport-utility vehicles (SUV) and pickup trucks are the most popular models making new car sales in the US.

For Tesla, Model X is supposed to be its answer to the SUV popularity in the US. However, even CEO Elon Musk said Model X is too complicated to configure and produce. So this means Tesla is missing out on roaring SUV boom. Adding insult to injury, Consumer Reports magazine rates the Model X second to last in its ranking of 15 luxury midsize SUVs.

For vehicle purchase, the deciding factor is still price (total cost of ownership, including resale value). Electric car prices are falling, but they still cost more than the gas counterpart due to their expensive batteries. With regular gas prices averaging $2.58 per gallon, it's hard to justify the price premium of an electric vehicle (EV).

Regarding resale value, according to Edmonds.com, "electric cars haven't yet proven their durability, and buyers of used electrics are worried about battery costs."   This could be another reason to deter consumers taking the plunge into an EV instead of a traditional gas car.

Many have debated when EV will take over the world. Well, here and now, at least not today nor in the near term. With this macro backdrop, how did Tesla as a company perform so far?

A Promise of “Positive Operating Income”

Tesla just released its fourth quarter earnings last Wed posting its biggest quarterly loss ever in the fourth quarter -- negative free cash flow of $(276.8) million and an adjusted EPS of negative $3.04 for the quarter. For the whole 2017, Tesla’s free cash flow (FCF) was negative $3.48 billion.

To soften the blow, Tesla said it's on track to produce 5,000 Model 3s per week by the end of its second quarter, and 2,500 a week by the end of first quarter 2018. The Model 3, with a starting price at $35,000, is Tesla's first vehicle targeted at the mass consumer market. According to Musk, once that Model 3 production target is met, Tesla could begin to generate sustained positive operating income in 2018. That “promise” partly pushed the stock up 3% on the day.

You might wonder what the big deal is about “positive operating income”? Every company is in the business to make positive income, right? Well, In Tesla’s case, the company has never made any money, that is, the company has been burning cash fast and furious since day 1.  Yet investors seem to think the lofty $320+ price per share is a bargain. So a promise by the CEO to have “positive operating income” in 2018 probably brought tears to the eyes of many shareholders.

Model 3 Production Ramp in Question

Model 3 production is an important cash factor to Tesla as the ramp-up could mean more money coming in from customers taking delivery thus alleviating concerns about whether the company had enough cash.

That production target for Model 3 has been delayed by Musk several times already. Apparently, Similar to Model X, Tesla has run into supply chain problem with Model 3 as well, which Musk has described as "production hell." Then last Friday, just two days after the earning release, Tesla filed with federal regulators to “clarify” CEO Musk comment regarding the Model 3 production schedule.

I’m not going to mince and interpret the words by Musk and Tesla, but I am inclined to share the lingering concerns by many analysts about the Model 3 production ramp and the company’s cash position.

Cash Keeps Burning

Furthermore, pay attention to the devil in the detail of Tesla’s earning call.

The company indicated its capital spending will rise “slightly” from the 2017 level. With $10.4 billion in long-term debt and capital leases (by the way, with negative earnings, Tesla does not even have a PE ratio), it is more than likely that Tesla will rip through its cash and raise capital again later in 2018.

Without this market frenzy fueled by central banks QEs, Tesla would have encountered serious financial problems long ago. Yet a charismatic CEO and a sexy vision (and promise) of a cleaner better world have kept investors cash coming.

The highest price target among the Wall Street analysts who cover Tesla is $500 per share. Ideology aside, investors really need to think long and hard before paying $320 a share (at least not in your 401K) for a company that can’t effectively resolve its operational issues and has never made a profit.

Disclosure: No Positions

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2018 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules