Six red flags that could have steered investors away from Tesla

5th Apr '18 by Ben Hobson

77 comments 19821 reads

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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DaviStoVest

8th May '18

Thanks for linking to this article. A fascinating read for a poor miserable economist like myself, only recently entered into the PI world. I think I'll have to work my way through it a couple more times to properly appreciate and understand it, though.

Regarding the particular case of Tesla, the argument that it is a micro-bubble is very well made. But even better made is the argument that it takes a brave man with deep pockets to bet against a bubble. It can take a long, long time before they pop.

“The market can stay irrational longer than you can stay solvent.” (John Maynard Keynes ... probably)

kalkanite

6th Jun '18

Interesting to see that Tesla is now the best selling mid size premium car in the USA.

Also since 2015 Tesla has installed a gigawatt hour of electricity....

https://www.fastcompany.com/40...

That's on top of large scale solar projects like this virtual solar power plant installation using 50,000 homes in Australia...

https://cleantechnica.com/2018...

Tesla are not just about cars.

Kalkanite (not a holder)

HHR

2nd Jul '18

Elon Musk's comment about not doing a cash call was made in the context of this financial year. I personally expect the new factories will be financed by further equity issue, although I also expect $tsla to be profitable by then.

BMW, Chevy, Nissan all make EVs today - and they are literally hundreds of miles behind $tsla. Where are these high range Audi's and Jaguars that we have been hearing about for years? When (and it is when not if) they finally get to market will $tsla have stood still in the interim?

It's true Elon Musk is a charismatic publicity seeker. But he's also an extremely successful entrepreneur (see Paypal, SpaceX).

Solar City is benefitting from Tesla's brand, retail network and customer base. Just like with the cars, the Tesla brand enables a premium price and that's why it made sense to bring Solar City under Tesla's wing.

MiserableJacktPotato

I regularly see a Jaguar iPace tracking up and down the M40. It’s close to being launch ready.
And people on other boards who’ve driven it says it’s good. Having had a reasonably good look at it (it says pre-production vehicle on the back), it has none of the fit and quality problems of the Model X. They, Jaguar, have invested well in electric motorsport, much like the serious ICE brands do, and if they are behind, will catch up quickly.

10th Jul '18

Thanks for replying. Time will tell. Personally I think commentators are underestimating the technology lead Tesla has. Even if the Jaguar is competitive with Tesla on range, surely most buyers will choose Tesla for the benefits of the supercharger network?
But my main reason for investing in Tesla is margin. Every Jaguar will be sold through a dealer who will take a cut and do a deal. All of Tesla's cars are sold direct to the customer at list price (no deals).
Looking ahead I see further margin gains due to automation although for the moment the model 3 seems like it might be a bit more hand crafted than the average Jaguar!

JohnEustace

13th Jul '18

I went on the Jaguar configurator last night and specced an i-Pace out of interest. It came to £75k quite quickly. They charge a lot for options that I would expect to be standard at that price point like folding door mirrors.
I might go for a VW Up! GTi next time to do my bit for the environment. Fully loaded that comes in at £16k.

jonesj

I would expect most of the industry to standardize chargers and therefore Tesla would have zero competitive advantage in this area over time.

Also, they have just announced a factory in China. So where would the capital for that come from ?

john2

I have read that Tesla were first in this field, but they designed their cars to take advantage of the technology rather than to be easy to manufacture. Jaguar are an established car manufacturer, so ease of manufacture would have been part of their design process from the start. And of course all the other luxury car manufacturers will be along with their offerings as time goes by.

19th Jul '18

When Amazon invented online shopping it was pretty obvious to everyone that it would be a big growth area for retail.

Similarly when the i phone was launched it must have been obvious to Nokia and HTC that it was years ahead of their contemporary offerings.

And yet decades later we see that the incumbent dominant players in retail and mobile telephony did not respond quickly enough to disruptive threats. I have worked in large companies and witnessed the paradigms that imprison corporate management. I know this may sound naive but personally I think one reason the Nissan Leaf and BMW i3 etc are so bad is that these companies simply 'don't have their hearts in it'.

$tsla didn't get to leadership in electric cars by luck. There will certainly be competition from established manufacturers but they will find it hard to catch $tsla up. As we have seen with the new roadster $tsla is continually raising the bar. Also $tsla's innovation isn't just in electric - they also lead in connected car and autonomous car (btw I am aware of the fatal accidents).

One of the advantages of $tsla's high SP is it can raise capital very easily, so combined with the tidal wave of cash from the model 3, funding new factories shouldn't be a problem.

Where were the Tesla board of directors while Musk was tweeting his recent wild allegations? Why haven’t they fired him - that would have been the fate of most CEOs.
My answer is that Tesla is a cross between a massive Kickstarter campaign and a cult. Without the leader they would struggle to keep the faith of the believers so he can’t be fired. Which could be a problem when the leader is turning into Silicon Valleys answer to Trump.
I hold no position.

20th Jul '18

The Model 3 will lose money at the lower end of the price range & will not hit the volume at the top end of it..
Tesla do not have a sustainable lead in autonomous driving and the major OEMs will be way past them within 5 years. It remains to be seen whether over the air updates will give the promised upgrade to full autonomous driving, or whether this is more hot air from the leader. {However, I'm very confident which way to bet on that one}

Tesla will simply not be able to fund the R&D on multiple fronts like the larger & profitable OEMs can do.
The automotive industry is unlikely to have a moment where someone creates an i-Phone and kicks Nokia into the long grass. It's a very different type of business.

Finally, as an investment, management integrity & honesty is one factor on the check list.

Effortless Cool

Agreed, JJ, except I would go further and say that they will never produce the $35k Model 3, and also suggest that most of the reservations they have are for that mythical vehicle. I expect demand to fall away as production increases.

GrahamF

21st Jul '18

I thought that the Chevrolet Volt and Nissan Leaf had sold and delivered more cars than all the Tesla models combined. So, who is really in the lead here?

Also, reputation is a fickle thing. You wait goodness knows how long for your Tesla model 3 to be delivered and then find out that they built it in a tent!!

There are very few ‘Teflon’ brands. Virgin seems to be one, Apple another. Tesla may be similar for now but there is a huge danger that they lose their desirability due to a bout of negative news the way they are going. (Production targets missed, building in tents to remedy that, build quality issues with the Model 3, what next?) If that happens the stream of deposits for new vehicles may start to dry up, the finances start to look ever more like a Ponzi scheme and the share price crashes.

peterg

22nd Jul '18

I thought that the Chevrolet Volt and Nissan Leaf had sold and delivered more cars than all the Tesla models combined. So, who is really in the lead here?

Yes, Nissan produces far more electric cars than Tesla, and has plans to massively increase.

Also I would say comparisons with "disruptors" like Amazon are misplaced. Producing an electric car - which traditional manufacturers were doing before Tesla - is nothing like as big a shift as setting up an online sales and distribution site.

A large part of good car manufacture has nothing to do with the drive chain. Reliability, servicability and all the non drive issues like suspension, interiors, seating. The big manufacturers have decades of learning to do those well. And decades of researching and developing new drive chains. Slotting in a new drive chain is not a massive shift - they are already doing it in most cases.

What Tesla had going for it was Musk (which is looking more and more like a liability) and the first real attempt at a performance electric car. With the likes of Jaguar now near to production I think that advantage is going to start looking pretty flimsy.

That doesn't mean I don't think Tesla can produce cars and make a living, but the idea that it will somehow come to dominate in the way that Amazon has is pure fantasy. They may do well as a specialist producer - but I very much doubt they will seriously challenge the large car companies.

Peter

23rd Jul '18

From Fortune,
"According to a report from The Wall Street Journal, Tesla has asked suppliers to refund part of the money it’s previously paid to them.
It is unclear how much cash back Tesla has requested, or how many of its suppliers have received this request. The WSJ calls the sum “meaningful,” and reports that the refunds are on payments made since 2016.
The appeal was reportedly made as part of a wider effort to make Tesla profitable. The request, which was sent in the form of a memo to several suppliers, noted that the cash back would be necessary for Tesla’s “continued operation,” calling it an investment in “long-term growth.”"
http://fortune.com/2018/07/23/tesla-suppliers-cash-back-profit/?xid=gn_editorspicks

schober

Have I understood that correctly? Tesla wants me to pay them to buy my parts? IMHO they can .......

TheWatchmaker

If my suppliers offered me cash to win supply contracts then the anti-corruption team would have a field day. So, how is it OK when it comes from the company offering the contracts?
Tesla are on very slippery ground here in my opinion.

26th Jul '18

good points.

There seems to be a perception on stockopedia that Tesla shares are held by an army of gullible amateurs like me. In fact according to yahoo finance 64% of Tesla stock is held by institutions compared to 62% for Apple.

27th Jul '18

Perhaps you could provide a citation that says the Model 3 caused governments to ban ICE cars. I doubt you can.

The reasons Model 3 will be loss making, according to articles I have read.
All the Model 3s have all the autonomous kit in them, whether or not the customer orders it.
They are hoping that customers will buy the expensive rather than the cheap versions. Time will tell.
Build quality on the initial models was terrible. They didn’t hire any/enough automotive specialists to design the cars and to design the assembly process. They’ve had to redesign the assembly process, and have resorted to building cars in tents. Should do wonders for build quality that.

Other manufacturers are designing their electric cars from the profits their ICE cars make. Tesla doesn’t make any profits and doesn’t look likely to any time soon. Making a huge cash call will not be easy for them, investor patience is already wearing thin. The fact that instis are already over exposed to Tesla reduces the likelihood they’ll want to dig even deeper into their pockets, especially since Tesla have all but admitted they can’t make a profit with the current cost base by asking their suppliers to subsidise the cars.

They’ve massively over promised and under delivered. I expect them to disappear within 5 years. They might have a future selling their IP to a company(s) that can actually make decent cars.

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......

Six red flags that could have steered investors away from Tesla

1. A High Bankruptcy Risk

2. Classic signs of a Momentum Trap

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Ben Hobson

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