- Cash generation is an issue for Tesla's daunting projects.
- Its Model 3 offering due in 2017 will lose the company money. Competition is bound to increase over the next few years.
- Solar & Utility companies are going to get in on the act in battery storage. This again will ultimately impair Tesla's margins.
A lot of stocks are not outperforming the S&P at present, in spite of delivering revenue increases. This could be considered a risk or an opportunity. We have this situation currently with Tesla (NASDAQ:TSLA). The company is expected to bring in over $8 billion in revenue this year which would be a sizable increase over last year's take. However, the company is still haemorrhaging cash which is a worry for shareholders, especially given that Tesla is considering more share dilution or a debt offering next year. To compare Tesla with Amazon (NASDAQ:AMZN) (multiple quarters of negative earnings) is doing Amazon a disservice in my opinion. Amazon's balance sheet is in a much better state and its growth has mainly been funded from within (gross profits). We can't say the same about Tesla.
Tesla's Balance Sheet Is Weaker Than Many Think
Tesla reported a cash balance of $3.27 billion at the end of its second quarter. This meant that its debt to equity ratio came in at a respectable 1.04. But this figure is not entirely accurate. First, $1.75 billion has already been earmarked for plant and equipment for the Model 3 in the back end of this year. Second, it repaid almost $700 million in July through a revolver and over $400 million in short-term debt. Therefore if and when the plant and machinery expense becomes due, this cash balance will be wiped out. This is why it comes as no surprise to me that the company is desperate to quickly raise money again this year.
No Real Compelling Competitive Advantages In Electric Vehicles
The main problem that I have with Tesla is that it's losing a ton of money every year in an industry that is going to be saturated within 5 years. This doesn't bode well for the future. If Tesla had technology or something that had unique competitive advantages, they would have a chance. However, the likes of Mercedes, BMW & General Motors are going to be producing in mass, excellent cost effective electric vehicles within 5 years tops and I doubt Tesla will be able to compete.
General Motors Surprised The Market With A Much Cheaper Electrified Alternative
We can actually see this playing out at the moment with General Motors' new offering - the Chevy Bolt which boasts of a range of two hundred and thirty-eight miles and a price tag of $37,500. This is almost half the price of Tesla's current Model S which in terms of performance and size is very similar to the Bolt. Now Tesla bulls will undoubtedly talk up the "Model 3" which is due to be out next March. This vehicle will be available at around the same price ($35,000) as the Bolt but will be a far superior car.
Model 3 As A Mass Market Car Will Still Lose A Lot Of Money Initially
Tesla has the advantage of its 70 supercharging stations which will definitely suit drivers undertaking long distances regularly. However, I just don't see how Tesla can make a meaningful profit on its "Model 3" considering how much the company has lost to date with its other high-priced cars. The numbers don't add up, and despite the company aiming to ship 50,000 cars at the back end of this year, I still don't think it will be enough to meaningfully bring costs down.
Battery Side Of The Business Will Struggle Over The Long Term
In terms of Elon Musk's attempts to turn Tesla into an energy company, I again have my reservations. Although there are still doubts on whether the Solar City deal will go through, Tesla's ambitions here are lofty, to say the least. Tesla, through the use of solar, wants to be able to offer cost effective batteries that will store electricity on a huge scale. Its Gigafactory project is enormous and only time will tell whether the company will be able to provide reliable low-cost energy in the form of a battery at scale.
The 20mw contract from California is a great start but again we are talking about an area where I believe Tesla will not be able to have enduring competitive advantages. Utility and solar companies could easily scale into this area if the numbers made sense. The chart below illustrates this. The cost declines in solar and batteries are taking place at break neck speeds. Energy storage will definitely involve batteries in the future but again I believe that mass market margins will one day undo the work Tesla is doing at present.
Source : Bloomberg.com
To sum up, I just don't see Tesla having enough competitive advantages to hoard off competition in the years to come. Furthermore, its competitors have far stronger balance sheets and will invest heavily in cars and energy when they feel it is the right time to do so. More downside risk than upside potential for me here.
Not impressed with Tesla? Check out Amigobulls' top stock picks from the auto sector.