The stock market’s recent strength has lifted a lot of stocks, especially those in the wildly popular Nasdaq-100 Index. However, I expect that at least one flagship stock in that tech index will falter in the upcoming months, namely Tesla.
For the record, I am a fan of electric vehicles like the Audi e-tron and Porsche Taycan. The Volkswagen Group
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(Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat and VW) will be making the most electric vehicles in 2020. Many are widely expected to be less expensive and of higher quality than Tesla’s comparable models. Tesla
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recently curtailed production of its expensive S and X models due to increasing competition from quality competitors, including Audi, Jaguar, Mercedes, Porsche and Volvo.
Amazon-like spending
To be fair, it is not uncommon for a younger company to lose money. Years ago, the more sales Amazon
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had, the more money it lost. Until the third quarter of 2018, when Tesla reported strong profits, it too was caught in a “rising sales, rising losses” cycle, but I think it’s wrong to think of Tesla as the next Amazon.
Amazon’s CEO, Jeff Bezos, spent money like a drunken sailor in the first five years of being public in order to get a competitive advantage in Amazon’s distribution network. Bezos understood that no brick-and-mortar business could ultimately equal his lower costs, despite the big initial investment. Walmart
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which is the largest retailer in the world to this day, cannot match Amazon’s distribution capability when it comes to home deliveries. I suspect Walmart will get a lot better at home deliveries as time goes by, but Amazon already has a large and happy customer base that will be difficult to convert. But Tesla does not have any competitive advantages in the automotive industry the way Amazon has in the world of retail.
War with short-sellers
A number of bottom-up investors see trouble on the horizon. Famed short-seller Jim Chanos is betting against the stock and has been very vocal about his position. (See Aug. 27, 2018, MarketWatch article, “‘The corporate-governance disaster that is Tesla continues,’ says one of the fiercest critics of Musk and company.”)
Elon Musk is fighting back and playing dirty in the meantime. He engineered quite the short squeeze in the summer of 2018 with tweets that he had secured financing for the company to go private, a statement that precipitated a fraud charge by the Securities and Exchange Commission and a large fine. (For more, see Oct. 3, 2018, MarketWatch article, “SEC settlement forces Tesla to give Elon Musk adult supervision.”) It is not a great sign that Tesla’s general counsel quit this week after two months on the job, and Musk’s questionable tweets do not appear to have the supervision that he has been ordered to get.
Model 3 or die
Tesla is now essentially betting everything on its Model 3, which is an attractive vehicle, but it is also unfortunately characterized by quality problems and poor internal design that complicates manufacturing. For example, there are 12 structural aluminum components in a Model 3 front fender vs three in most modern cars, so the Model 3 requires more labor and energy to manufacture. Tesla is anticipated to have a growing glut of Model 3 vehicles and recently cut its price to stimulate sales. It doesn’t help that Consumer Reports this week stopped recommending the Model 3 because of reliability concerns.
Some Teslas have caught on fire due to battery problems. Tragically, two teenagers were burned alive last year in a tragic Model S accident in Fort Lauderdale, Fla., which the National Transportation Safety Board is investigating. The car was traveling at 116 mph in a 30-mph zone three seconds before it crashed. In the incident, the car’s lithium-ion battery ignited twice more after the initial fire, as the Tesla Model S sedan was being loaded onto a tow truck and again at a storage yard. For a car using no gasoline, catching fire three times in a single accident sure does not sound safe.
One problem is that Teslas are wired to accelerate faster than the Audi and Porsche electric vehicles, but it is bad for lithium batteries to get too hot under extreme acceleration. Tesla’s “ludicrous mode,” which is used to accelerate faster than any other production car, overheats lithium batteries and shortens their battery life.
Big competition
VW rejected the dangerous “round” lithium battery cells that Tesla continues to use, and its new mission statement is to quickly surpass Tesla’s market share with higher-quality vehicles that use safer as well as longer-lasting lithium batteries. Both VW and GM
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will soon be making higher-quality and cheaper electric vehicles than Tesla, so it is not inconceivable that Model 3 sales will keep falling.
Taking all of these issues into consideration, I think the odds are stacked against Tesla. I think the stock is a short-sale candidate, but not for the faint of heart. On top of all this, there is the economic cycle to worry about as Tesla has never operated at any scale during an economic recession. (The present U.S. economic expansion will be the longest in history in July 2019, running at over 10 years.)
Tesla is still a luxury-car maker at a time when competition is intensifying, and its low-end strategy has not yet completely paid off. If there is a recession in the U.S. in the next couple of years, Elon Musk will find out the hard way that selling a premium product in a recession may cause a new stagnation of sales at Tesla, which is just today breaking cash flow positive, to become a heavily money-losing proposition.
I realize that Tesla is somewhat of a cult company, with many investors in the stock following Musk as their visionary leader. But investing is not about cults. After I wrote this take on Tesla, I showed it to my firm’s investment chief, who agreed with it. A couple of Tesla drivers saw it too, and one described it as a selective use of facts. If Tesla’s stock gets cut in half from here in the next couple of years, I beg to differ.
Ivan Martchev is an investment strategist with institutional money manager Navellier and Associates. Note: Navellier & Associates does not own Tesla in managed accounts or in a sub-advised mutual fund. Navellier & Associates does own Amazon and Walmart in managed accounts and a sub-advised mutual fund. Ivan Martchev does not personally own Tesla, Amazon or Walmart.
Source : MTV
