Editor's Note: Last Tuesday, shortly after noon Eastern, we got an email from Michael: "As I researched Tesla Inc. following its Aug. 2 earnings call, my gut told me something was wrong, and not to believe the hype that a turnaround was suddenly imminent. So I spent the weekend doing a deep dive on Tesla, sorting through the financials, looking at the bigger industry, and going over the stock's charts. The results led me to type up this sell report I've attached. Run it next chance you get." So far, so normal. Then, literally as we began reading that attachment, Elon Musk's now-infamous tweet hit, at 12:48 p.m.: "Am considering taking Tesla private at $420. Funding secured." Not long after that, the Nasdaq halted trading on Tesla - and Musk, his company, and his tweets have been at the top of the news ever since. Instead of getting Michael to rewrite his report, we've decided to run it as-is. Here's Michael...
On Aug. 2, the bulls got their sweet revenge.
Shares of Tesla Inc. (Nasdaq: TSLA) leapt 16% to their highest close in nearly five years following its latest earnings report.
Turns out, short sellers worried about production snafus for the new Model 3 and other concerns got hammered, despite paper losses of nearly $1.7 billion.
You'd think a longtime Tesla enthusiast like me would be happy.
Just the opposite is true.
In fact, I believe now is the time to sell Tesla and use the most recent rally to take whatever profits you can.
Let me be clear: I didn't come to this conclusion lightly. You see, I have the highest regard for CEO and founder Elon Musk. I believe he's one of the great technology geniuses of our time.
But the company is facing a host of challenges at a moment when the stock has been on a roller-coaster ride.
With that in mind, let's walk through the reasons why I now have Tesla listed as a "Sell."
Starting with...
When a Mea Culpa Is Not Enough
Now then, on Aug. 2, there were two good reasons for Tesla shareholders to be happy.
- Musk promised the company would be profitable this year.
- Musk apologized to analysts on the quarterly earnings conference call.
See, during the previous quarter's earnings call, he had been snide and insulting to them. Those comments soon became the talk of Wall Street and the financial media, where pundits started raising questions about Musk's leadership skills, quickly casting a pall over the stock.
But the mea culpa and promise of earnings ahead were enough to add billions to Tesla's market value.
But here's the thing: This short-term sugar rush doesn't change the challenges the company faces.
Not at all.
And these challenges - when you add them all together - are why I think Tesla holders should take profits and sell the stock.
Now.
Tesla Challenge No. 1: Crowded Landscape
Yes, Musk has created one of the great cars of all time.
He's built a high-quality, extended-range, premium electric vehicle (EV). And he caught the rest of the auto industry off-guard.
Right now, his firm has the EV market mostly to itself, and Tesla is enjoying impressive sales growth. The firm is on pace to build around 208,000 cars this year, according to KeyBank, and that figure may swell to 462,000 by 2020.
About 80% of those sales will come from Tesla's least-profitable car, the Model 3.
But this market is about to swing wide open. No doubt Musk is keeping an eye on the calendar as a tidal wave of new premium EVs will be coming to market within the next 24 months.
Other premium automakers, especially German ones, have been working hard behind the scenes to roll out a range of "Tesla killers." Consumers who have been thinking about buying a Tesla will soon hear about a lot more options to consider before buying.
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For those in search of SUVs, for example, Jaguar is rolling out the I-PACE next month. It matches up almost spec-for-spec with Tesla's Model X - and it will be up to $10,000 cheaper.
Porsche SE aims to steal Tesla's thunder in the sports car department with its new all-electric Mission E.
Meanwhile, Tesla's high-end sedan, the Model S, could begin to struggle once it sees true competition. Mercedes-Benz, for example, will offer electric versions of all its vehicles by 2022.
And we haven't even touched on the premium EV plans from Audi, Volvo, BMW, and others. Each one of these will pull out all the stops to capture a big slice of Tesla's market.
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Tesla Challenge No. 2: Debt and Dilution
While Tesla's first-mover advantage is crucial, the firm could grow in size only by piling alarming amounts of debt onto its balance sheet.
And to pay down that debt, the firm will need to see a big spike in profits for each vehicle made.
So right now, Tesla makes about 15% gross margins on each EV. That's just not enough to cover research and development, marketing, and all its other fixed costs.
That means Tesla is on track to lose more than $1 billion this year.
At the end of the second half of the year, Tesla had more than $9 billion in current debt, such as accounts payable receipts, and another $9.5 billion in long-term debt.
That loan burden led Moody's to downgrade Tesla's debt earlier this year deeper into junk territory to B3. It's just one more debt downgrade away from Caa. That's how Moody's rates bonds that "are considered to be of poor standing and subject to very high credit risk."
Let's be clear. Musk is working his tail off to reduce Tesla's cash burn for a very basic reason. His firm is unlikely to receive any more loans, unless it wants to pay very high rates of interest. The firm is already bleeding out around $150 million every quarter on interest expenses.
As a result, Tesla can really only count on selling more stock, which has already caused massive dilution for investors. At the end of 2015, Tesla had 128 million shares outstanding. That figure has surged past 170 million - and counting.
A higher share count means that Tesla's earnings per share will dip.
That assumes, of course, that Tesla grows large enough to become profitable...
Tesla Challenge No. 3: Choppy Trade and Better Plays
Now, as much as I love to look for tech leaders with great management, sales growth, cash flow, and earnings, there's another method I use to find winning stocks.
I'm talking about technical analysis. I've developed my own unique charting system, and when I run Tesla through my Real Demand Tracking System, it shows a stock that is very choppy. My system proves that Wall Street is wishy-washy about Tesla.
That ambivalence is greatly sinking the chances for a good long-term uptrend.
Not only that, but it makes it difficult to know just when to get in or out. Tesla's position in the market also explains why over the past year its stock was dead money. In other words, its share price went sideways. During the same period, the S&P 500 gained 15%.
Moreover, tech leaders like Amazon.com Inc. (Nasdaq: AMZN), Microsoft Corp. (Nasdaq: MSFT), and Apple Inc. (Nasdaq: AAPL) did even better, coming in with upticks of 85.8%, 49.2%, and 31.5%, respectively.
But despite another 7% rally on Aug. 7, Tesla is up a mere 3.5%. Plus, the stock has gone on four failed rallies this year.
In other words, Tesla largely sat out a great bull run for tech stocks. This alone is a reason to book gains by selling into strength.
Avoiding Dead Ends
Again, I can't stress enough the deep respect I have for Elon Musk, one of the greatest inventors in our nation's history.
Simply put, he has forever changed the automobile landscape and redefined luxury cars. And he's shown an equally impressive knack for winning the hearts and minds of investors.
But many of the key factors that have propelled Tesla to lofty heights, including having the premium end of the EV market all to itself, are soon to change in a big way.
The road to wealth is paved by tech - provided you don't drive into a blind alley like the one that awaits Tesla.
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The post Elon Musk's Tweet Just Reinforces Our Tesla Call appeared first on Strategic Tech Investor | Michael A. Robinson
About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.