Six red flags that could have steered investors away from Tesla

Thursday, Apr 05 2018 by
Six red flags that could have steered investors away from Tesla

U.S. automaker Tesla has been one of the most talked about stocks in the world in recent years. Under the leadership of its maverick visionary boss Elon Musk, the company is endeavouring to make desirable, affordable, battery powered cars for the mass market. So it’s little wonder that Tesla’s stock price has soared over the past five years.

Yet behind the attractive story are some nagging concerns. Manufacturing bottlenecks, mass recalls, missed targets, stiff competition and a recent fatal collision involving a Tesla on autopilot are just a few of them. As a result the stock has drifted over the past year and recently collapsed to wipe out all of its 2017 gains. It’s been a painful experience for latecomers to Tesla - but there were a series of red flags that were warning investors to steer clear.


1. A High Bankruptcy Risk

This April Fool’s Day tweet from Musk suggests the Tesla board are relaxed enough to take a light-hearted view about the company’s future. Yet this is a business that has consistently shown the characteristics of firms that go bust.


Assessing bankruptcy risk is not easy, but one way of analysing a company is to use a checklist called the Z-Score, which was designed by finance professor Edward Altman. The Z-Score rates companies against a set of features that are commonly seen in firms that go to the wall. So while it’s not built to predict a bankruptcy, it does aim to measure how closely a company resembles other firms that have filed for bankruptcy in the past.


Tesla has regularly scored close to the Distress zone on the Z-Score over the past year. Even if its bosses are confident about its financial well being, these kinds of bankruptcy red flags are concerning.


2. Classic signs of a Momentum Trap

In recent years Tesla has never ranked well in the market for its overall exposure to the three return drivers of Quality, Value and Momentum (summarised in Stockopedia’s StockRank). Its poor financial quality and expensive price have been very consistent. Nonetheless, its increasing popularity - evidenced by its rising share price - suggests that the Tesla story was appealing to investors. Indeed,…

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Tesla, Inc., formerly Tesla Motors, Inc., designs, develops, manufactures and sells fully electric vehicles, and energy storage systems, as well as installs, operates and maintains solar and energy storage products. The Company operates through two segments: Automotive, and Energy generation and storage. The Automotive segment includes the design, development, manufacturing, and sales of electric vehicles. The Energy generation and storage segment includes the design, manufacture, installation, and sale or lease of stationary energy storage products and solar energy systems to residential and commercial customers, or sale of electricity generated by its solar energy systems to customers. The Company produces and distributes two fully electric vehicles, the Model S sedan and the Model X sport utility vehicle (SUV). It also offers Model 3, a sedan designed for the mass market. It develops energy storage products for use in homes, commercial facilities and utility sites. more »

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76 Comments on this Article show/hide all

HHR 27th Jul 57 of 76

In reply to post #385814

Hi, sorry, I deleted my post - I decided wine induced ramblings are not cool!

Thanks for replying. As you point out Tesla build quality isn't as good as competitors. However their net promoter score is 97 - that shows that as far as customers are concerned quality is good enough.

I agree they have under delivered against wild promises but I still think what they have actually delivered is pretty impressive. 

Personally I think the supplier rebate issue is a red herring but there's no point going on about it let's agree to differ time will tell as you say......

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JohnEustace 8th Aug 58 of 76

With one bound he was free ?
Taking Tesla private makes sense to me if the funds are available.
The shares are trading after hours at $377 some way below the $420 Musk says he will pay.
It doesn’t help that 420 is code for smoking cannabis, but if he is to believed there could be 10% upside for those buying now.

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Edward John Canham 8th Aug 59 of 76

All those red flags yet everyone gets out at a profit.

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schober 8th Aug 60 of 76

What happens if he cant get teh money?

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Edward John Canham 8th Aug 61 of 76

In reply to post #389109

Ah well, then there'll probably be a problem due to loss of face of its "charismatic" leader.

However, Stockopedia doesn't have a loose cannon CEO stat.

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JohnEustace 8th Aug 62 of 76

If the money isn't really there then I expect he gets to spend more time than he would wish answering "dry" questions from the SEC.

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TheShareWhisperer 8th Aug 63 of 76

In reply to post #389049

"10% upside for those buying now."

So are you buying ?

Care to estimate the downside if the deal doesn't go through.

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JohnEustace 8th Aug 64 of 76

I think if you look at my earlier posts in this thread you'll see I'm no Musk fan. I do think it would be a good idea to take Tesla private and think he is sincere in his intentions.
I was just highlighting the size of the gap as a measure of the market scepticism regarding his chances of succeeding. I have no idea what will happen and I try to avoid gambling so suggest this is best watched from the sidelines.
The downside for those buying will be a function of their stop losses - I certainly would not get involved here without one, preferably guaranteed.

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cig 8th Aug 65 of 76

In reply to post #389159

Let's play:

- Deal is fake (claimed funding doesn't exist): target price 150, probability 10%
- Deal fails due to external cause (shareholder vote, regulatory): target price 400, probability 40%
- Deal goes through: target price 420, probability 50%

That gives a fair price: 385, and a probability weighted fail price of 350.

I'm surprised the market doesn't believe it. It's a great time to go private: the shorts will probably pay most of the cashing out shareholders: with 20% short there's 1.2 long per actual share, and the free float is 68% so if 1/3 of the free float longs want cash the cost of the deal for Musk is zero. Some non shareholders will probably want in before the gates close, which is also a free way to pay for some of it. Musk merely needs some backer taking the risk a little top up is required. I'd bet it's SoftBank.

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TheShareWhisperer 8th Aug 66 of 76

In reply to post #389224

"Deal fails due to external cause (shareholder vote, regulatory): target price 400, probability 40%"

Surely you mean target price 300, in that scenario.

Remember the title of this article, red flags and all that. Tesla is heavily indebted and loss making.

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DaviStoVest 9th Aug 67 of 76

In reply to post #389224

I like your simple but methodical approach. It cuts straight to the chase.

You will never get exactly the right answer following this sort of method ... but you will likely get pointed in the correct direction.

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cig 9th Aug 68 of 76

In reply to post #389389

An external cause for the deal failing means people ready to pay 420 going public, which tends to support the price in the short term, which is what we’re trying to price here (from now to the deal’s conclusion).

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Wimbledonsprinter 9th Aug 69 of 76

In reply to post #389224

I think that the probabilities are not static. Every hour that there is not a confirmatory full press release from the company, increases the probability that your first case is the reality. I don’t know if 10% is the right percentage - but whatever it is it is increasing until there is firm news.

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jonesj 9th Aug 70 of 76

So far, no source of funding has been disclosed.

Getting funding @ $420 would be remarkable.

Furthermore, I believe it would be more economic for a backer to quietly buy up to 29%* of the shares at more modest prices , before declaring a bid to take it private.  (* Or whatever is permitted in the US).   Tweeting we're paying $420 would not be the way to do it.    I couldn't imagine the organization providing the alleged funding would be happy about Musk announcing it before stake building has taken place.

I doubt the whole thing.
The market must doubt it too, as the stock price is still below the highest seen in the last 2 months & remains a long way from $420,

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peterg 10th Aug 71 of 76

I can't see Musk's behaviour, in general, or about this in particular does Tesla any favours. "Announcing" the news via Twitter and not as a proper notice - still no detail given of the "funding" may seem a smart move to Musk and his fan club, but the SEC aren't so impressed, and he's presumably going to need some interested institutions to fund and carry it off. They might worry just who they are doing a deal with.

It might be a bit unpopular if the SEC sent him to jail, and it probably won't happen, but integrity and reputation are useful things to have when you do business, and he's probably just undercut those, again!


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JohnEustace 10th Aug 72 of 76

In reply to post #389849

It very much depends for Musk whether the money really is there. If it is, slapped wrist time for the method of announcement. If not, serious trouble lies ahead.
Matt Levine made me laugh with this in his newsletter:
"I bet that all work at the SEC’s San Francisco office stopped yesterday as they conducted an office-wide arm-wrestling tournament to select the person who got to make that call. You work your whole life at the SEC just for the remote chance that one day you might get to be the one to call up Tesla, hold up a hand to quiet the hoots of your colleagues who are listening in, take a deep breath to suppress your own giggles, and say into the phone: “So … how’s that financing?” Of course the SEC is looking into this. I can’t think of a thing that the SEC would look into more. If Warren Buffett was giving insider tips about accounting fraud at the Fed to Lloyd Blankfein so that he could help Donald Trump and the pope insider trade against the Illuminati, the SEC team investigating that would be scheming to get transferred to the Elon Musk team. The Elon Musk team is already shopping for the commemorative flamethrowers they’ll get when they finish."

The whole article is well worth a read.

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Andrew L 12th Aug 74 of 76

I hope Tesla and Elon Musk to succeed. However, I think there are three issues: cash, costs and competition. I also think there is an inherent sector issue.

Tesla is often compared to Apple or Amazon. The trouble is those companies are in very different sectors. Apple's iPhone is incredibly profitable and has seen off the competition. The Smartphone market has become a duopoly due to the app stores on the Apple and Android platforms.

Amazon was loss making in a similar way to Tesla. However, it had a structural cost advantage over the established high street competition. I am not sure Tesla has a structural advantage although some people believe it does i.e. vertical integration of battery manufacturing, no retail forecourts (car dealers) for selling cars.

The trouble is that Tesla is in a fiercely competitive sector and it is a car maker. Some people believe Tesla's charging network is a barrier to entry but I am not so sure. If electric cars are the future then charging stations will be everywhere.

The bottom line is that Jaguar's i-Pace is the first real competition that Tesla has received since the group started. Many reviews say that the i-Pace is an equal if not better car than the Model S and the Model X. If that is true what real competitive edge can Tesla maintain? The i-Pace looks really good value and is well finished.

Tesla's balance sheet is very weak and the group hasn't been able to get its costs under control. All this against the backdrop of increasing competition. I just can't see how the risk/reward ratio is attractive.

Article focusing on Tesla competition:

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abtan 28th Oct 76 of 76

FYI for those still following Tesla:

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