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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77 Comments on this Article show/hide all

Murakami 6th Apr '18 18 of 77

Ben didn't mention the risks for shareholders of ongoing dilution !  That's critical imo.   There's been 50% dilution for shareholders in the last 5 years.   That's only going to continue. 

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jonesj 6th Apr '18 19 of 77

For batteries, Tesla will have to compete with any number of battery suppliers & cope with falling prices.

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richard street 12th Apr '18 20 of 77

Telsa is just another company that can be traded on the stock exchange and the reason for me using Stockopedia is for helpful information when trading and that's exactly what this article gives me.
So getting all excited about cars and battery's and raving on doesn't look at the hard facts.
I use the ratings on this site to help me decide whether to trade or not.
Simple as that. Richard

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IGotPoesJacket 13th Apr '18 21 of 77

You don’t think the companies products, their cost and their quality are useful pieces of info in deciding whether to go long or short?
The “hard facts” don’t give you any assessment of risk of litigation or regulation.

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Hot Socks 13th Apr '18 22 of 77

Charismatic CEO, great story (revolutionising the energy market), cash hungry, no profits, heavy stock dilution, increasing debt, history of fundraisings. It is a classic speculators' stock in my view where the share price rests on the belief in a large delivery of jam the day after tomorrow. If you want to take a punt on it or trade it with your eyes open then fine but how anyone could miss the red flags or believe this is a solid investment case is utterly beyond me.

I wouldn't short it because as the saying goes the market can stay crazy for longer than you can stay solvent.

Elon Musk must be a very brilliant man to have convinced so may people to part with billions of pounds - I wish I could do that - but that is the talent that has made him rich, he hasn't done it by creating a profitable car business.

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Luthrin 13th Apr '18 23 of 77

These red flags and comments remind me of a 'hot stock' I avoided twenty years ago for much the same reasons. I was convinced it wouldn't survive and I was incredulous that anyone would invest in it.

Here's a Guardian article from June 2000, when it looked as though my expectations were about to be realised:

Amazon.bomb: How the internet's biggest success story turned sour

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john652 14th Apr '18 24 of 77

I love Elon, he's what the world needs more of, but there is absolutely nothing about telsa that tells me to invest my own money but there is everything about it that tells an institutional/fund manager to invest their clients money.
Blue sky, other peoples money stock if ever there was. Maybe it's the next Amazon but the risk is way too high for me.

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Hot Socks 17th Apr '18 25 of 77

In reply to post #353253

Yeah I know, and you could find something similar about Apple no doubt. And a lot from 2000 that didn't do so well. Tesla might work out well or it might not. Who knows?

I'm not incredulous that someone would invest in Tesla. I can see the case for playing the percentages and hoping that one of a basket of stocks does well enough to pay for the others, or frankly just taking a punt on it with money you can afford to lose. Certainly if you catch it at a point where he price is bombed out.

What I can't fathom is the sense that people put their money in out of a genuinely held belief or faith that "this is the one" when, without the benefit of 18 years' hindsight, no-one can possibly know that.

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JohnEustace 23rd Apr '18 26 of 77

For those really interested in the Model 3 this lengthy video goes into a lot of detail about what they got right and wrong based on a discussion with an industry expert. His consultancy bought two cars to tear down and report on every component.

The short version is that the “future stuff”, the control systems and batteries are way, way ahead of anything being done elsewhere and the traditional manufacturers should be worried because they aren’t even in the race.
But Tesla got the “dinosaur technology” badly wrong - the basic processes of making cars, the fit and finish of panels, the over reliance on robots. They basically ignored over a hundred years of auto manufacturing learning and are paying the price.

Some of the issues are shown here

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Howard Marx 23rd Apr '18 27 of 77

I've been reading a great article on market bubbbles by Rob Arnott, Shane Shepherd & Bradford Cornell who make the case that Tesla stock is a micro bubble of its very own.

"Tesla’s current price is arguably fair if :

  • most cars are powered by electricity in 10 years
  • most of these cars are made by Tesla
  • Tesla can make those cars with sufficient margin and quality control and can service the cars properly
  • Tesla can raise additional capital sufficient to cover a $3 billion annual cash drain and another billion to service its debt. 

To us, that seems an unduly optimistic array of assumptions, especially given the magnitude of Tesla’s debt burden. Such an argument ignores the deep pockets of competitors and the common phenomenon of disruptors being themselves disrupted by newcomers. Absent the unfolding of this rosy scenario, Tesla’s current price would require remarkably aggressive assumptions to deliver a positive risk premium."

Well worth a read: https://www.researchaffiliates...

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matylda 23rd Apr '18 28 of 77

In reply to post #356208

Great post

Blog: Briefed Up
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JohnEustace 3rd May '18 30 of 77

Elon's acting like a jerk in the earnings call yesterday must bring forward the time that he is made to step to one side at Tesla and install adult supervision of the design and manufacturing functions. Maybe he already knows that and was in a sulk in the earnings call.
That would ideally coincide with a fundraising to improve their balance sheet.

But I may be being too optimistic - if the vehicle engineering or manufacturing issues take too long to fix and/or those Model 3 reservations don't convert into orders then bets could be off.

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Edward John Canham 3rd May '18 31 of 77

Understand, once again, production has been suspended for a week or so to resolve problems.

Worked for American companies - they have great production engineers - I strongly suspect his ego is getting in the way. Never let ideas men loose on production.


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jonesj 3rd May '18 32 of 77

In reply to post #360758

I don't entirely see how they are going to make large profits even if hitting the 5000 unit a week mark.
Also, Tesla are about to see competition from Jaguar, Audi & all the others.

Tesla is more interesting as a short.

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JohnEustace 4th May '18 33 of 77

In reply to post #360778

I agree. There are thousands of people who could fix this, or maybe could have fixed it - I fear it may be getting too late now.

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andyfwwrench 5th May '18 34 of 77

In reply to post #350053

kalkanite - in what way does Tesla have solar? How are the formerly known as Solarcity products superior to any of the dozens of other suppliers? Solar, a decades old industry, has long been commoditised. If Solarcity was so successful why did it have to be rescued by Tesla? To say Tesla is insignificant in PV development is to give it way to much credit. The NREL state of play chart gives a good one page summary of names to look out for: For example you will see First Solar, FSLR (no position, Stockopedia metrics don't excite me, don't know more than the informed investor)
This is just raw efficiency and very much the IP end. If you want to investigate the consumer end in the US then maybe sign up for energy sage market place, and put some dummy zip codes in to see what the competition is like.

So phrases like, "TSLA also have solar" is an emotional crutch and not the detached analysis that the operating metrics provide.

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kalkanite 5th May '18 35 of 77

In reply to post #361238

Andy, Tesla quite simply do have solar, the clue was in the name of SOLAR city! Just look at the 44MW solar array with battery power pack project that Tesla have won to supply 50,000 homes in Australia here......

Not sure what point you are trying to make but if you google Tesla solar power projects you can see for yourself.

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kalkanite 5th May '18 36 of 77

In reply to post #360798

jj - I think the idea is that once they achieve something like 5000 cars per week they will copy and paste the mega factories around the globe. Will they get there? I don't know but the copy and paste should be quite a quick role out. I was certainly unimpressed with Elon's reaction to some of the analyst's questions at the earnings call. However, he is an incredibly successful entrepreneur so I wouldn't personally bet against him but then I'm not invested in Tesla either for now at least.

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IGotPoesJacket 6th May '18 37 of 77

How are they going to fund the other mega factories? Musk has said they won’t be making a cash call.....

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