A year ago we penned a realistic, but negative article on the electric car company, Tesla. At the time, the stock traded for a lofty $310 per share.
Our reasons were fairly straight-forward. Tesla is an interesting company with loads of innovation led by a visionary in Elon Musk.
However, just because something is revolutionary does not mean it is a great investment. Consider the invention of the automobile, the airplane and the internet. All dramatically changed the way we live….and all have proven to be disastrous investments.
Furthermore, Tesla was heavily burdened by $10 billion of debt while losing $2 billion per year. Tesla has never made a full-year profit despite becoming a force in the auto industry.
That is a significantly deep hole to dig out of. However, analysts and Elon Musk disciples continued to believe in the company and its stock.
A year ago the market valued Tesla t more than Ford or GM, despite its losses. At the same time, the combination of Ford and GM produced net profits of $15 billion.
Since we wrote our initial article Tesla stock skyrocketed to $350 per share as recently as February of 2018. This made our cautionary words seem rather foolish.
However, time is the friend of the quality company and the enemy of the mediocre one. Unfortunately, the perfect storm appears to be swirling around Elon Musk and Tesla.
Tesla has struggled to ramp up production of its first mass-market car, the Model 3. At $35,000 the Model 3 is quite affordable. However, Tesla can’t seem to produce them in large enough quantities. Initially, they projected 5,000 per week would roll off the assembly line. Then that figure was reduced to 2,500. Production in the fourth quarter of 2017 was slightly above 1,000.
As it misses production targets, it burns through cash. However, they still have to pay interest on their massive debt load and get their bankers to renew debt of more than $1 billion just in the next year.
Adding insult to injury, Moody’s Investor Service downgraded Tesla’s debt rating to B3 (six levels into junk territory) and gave a negative outlook. This means that refinancing existing debt, if possible, will be even more expensive. Furthermore, suppliers, who are currently owed $2.4 billion, will keep Tesla on a very short leash.
As if this is not enough, the U.S. National Transportation Safety Board is currently investigating two accidents involving Tesla vehicles.
These difficult issues mean it is even more important for Musk to be able to raise approximately $2 billion to prevent a liquidity short-fall.
Each of these hurdles, in isolation, may not be that bad. However, when you combine the cumulative effect you quickly realize Tesla is a company, is headed for significant stress, if not a restructuring.
As Elon Musk battles these issues, the stock in his company has painfully fallen by more than 35% in the last six months.
There are many valuable lessons for investors to learn from Tesla, however, two are at the top of my list.
First, just because you like a given product does not make it a good investment.
Secondly, the greater the capital intensity a given business requires, the more likely it is to borrow large sums of money. Companies that borrow large amounts of money are far more affected by the economic cycle, the whims of consumers and demanding bankers.
Whether individuals, corporations or governments, borrowing large amounts of money puts an entire entity at risk for a total wipe out. Unfortunately, Tesla fits in this category.
As we concluded a year ago, Tesla remains in the “too hard” pile. The smart investor will realize they don’t have to swing at every pitch. There are far easier decisions to be made.