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  • Brett Schafer

Getting Real With Tesla Stock

Please note I do own a minuscule amount of Tesla put options that shouldn’t but probably will make you think I am biased against the company

With delivery numbers down heavily for the 1st quarter, the bull case for Tesla is looking weaker by the day. I believe investors in the company are overestimating vehicle demand by a wide margin, which is the main reason Tesla slashed selling prices at the end of the quarter.

Why do I think this? Because I used to be the biased Tesla bull who, up until February, thought this was going to be a trillion dollar stock and the next Apple. It’s astonishing how blind you can be when not seeing the full picture of a company.

Valuation Insanity

When reading articles or listening to discussions about Tesla, the narrative today seems to circle whether the company is going to run out of money. And while I believe there is a decent chance they do run out of cash, just because they don’t doesn’t make the current valuation any less of an absurdity.

Let’s do a quick extrapolation based on some conservative full-year vehicle and margin estimates (I’m sure there are some dedicated bears with more in-depth analyses, but for now this will do). If Tesla can deliver 300,000 vehicles in 2019, based on operating income of $414 million in Q4 2018, they won’t even be able to break $1.5 billion in operating income in 2019.

And that rough estimate doesn’t take into account 2019 bond payments, model S and X (the highest margin vehicles) deliveries falling off a cliff, price cuts, or the increasing inventory glut. With those materially significant headwinds in mind, I would be shocked if Tesla has positive operating income in 2019.

So why does Tesla still have a market cap of $47.5 billion and a price-to-sales ratio of 2.2? It would make a whole lot more sense from a valuation perspective if the stock price dropped 75-80%, especially if they are going to continue pumping out low margin cars, and that’s if you think they aren’t going bankrupt.

If any bulls see upside at this price, please let me know why you believe that, because I see no clear path forward from here.

Where is Solar?

Remember when Elon announced the “revolutionary” solar roof tile in October of 2016? If not, no worries, because there hasn’t been a peep about making the product even though they promised to start delivering it in the summer of this year.

Solar is supposed to be a part of the Tesla energy flywheel, be we still can’t get a real product to be manufactured. The energy storage has been taking off, I’ll give them that, but it won’t save the firm from going belly-up. No bones about it, this roller-coaster ride depends solely on automotive production and demand.

What Could Save Tesla?

From my vantage point, the key to Tesla saving itself without raising money is to get the Chinese Gigafactory up and running as fast as possible. It is apparently going up quicker than expected and could be operational by the end of 2019. The problem is, at that point, it might be too late. With demand falling in the U.S. they need to start delivering way more cars in China than they are right now, and the only way to do that profitably is with the Gigafactory.

If you are one of the 130,000 Robinhood users with Tesla stock, please rethink the risks associated with this company, and if there is truly any upside from here. Stop listening to all the noise puked out by Elon and the media, look at the facts, and understand that the growth story is all but over.

Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.

#Valuation #Model3 #ModelS #ModelX #China #Tesla #deliveries #Solar #demand

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