Tesla: hope is not a strategy

I am a long-time fan of Tesla. I am a long-time fan of Elon Musk’s vision and what he has already accomplished. I love their cars (not their SUV), I love their solar roofs, and I love their home energy storage solution. I am always rooting for Musk to succeed in his vision of a clean energy future and Tesla’s role in that future.

But I’ve never bought a single share of Tesla.

My investing expertise generally revolves around understanding whether a business model is working and taking an educated guess at fair value. When these two things line up on specific companies it usually involves an old, stodgy business that is out of favor for some reason but still throwing off a decent amount of cash.

On the flip side of that, I’m also decent at identifying broken or troubled business models where growth or profitability is going to be hard to come by.

So when it comes to companies like Tesla, ones with a seemingly bright future but no cash flows, I usually don’t buy any shares because I don’t have a good guess as to their value.

The interesting thing about Tesla is that its share price has been pushed ever higher because of strong demand for the products they make. Investors, both equity and debtholders, have ignored the cash burn because they believe there is enough demand for the products to eventually get the economies of scale necessary to turn a profit.

Plus they created a market and currently have the sexiest product available. But in a few short years all the other major automakers will be bringing their EVs to market at a price point that will likely be lower than Tesla’s Model 3. The competitors’ price point will be lower because quite frankly, Volkswagon, GM, Ford, Toyota, and Honda are all better manufacturers than Tesla.

The problem is that investors may be losing faith in Tesla’s near future. For the longest time a profitable quarter has been right around the corner and Musk’s promises have been believed. He even managed to string together two consecutive positive quarters in 2018. However, the tipping point may have been the most recent earnings call with Musk, combined with the following challenges and changes:

  1. Tesla is closing most of its retail showrooms and laying off staff in order to save 6% of cost per Model 3 car sold.
  2. The Model 3 lost the Consumer Reports endorsement and is being plagued by questions about quality and service wait times due to Musk’s “production hell”.
  3. A prediction by Musk of another quarterly loss.
  4. Musk’s continued run-ins with the SEC.
  5. And most damning of all: the possibility of slowing demand.

As someone who loves the idea of Tesla, it’s hard for me to say it, but Tesla may be a better short opportunity than a long opportunity. Tesla still has a ton of things going for it that might make it a long-term winner, but a lot of investors and traders have started to wonder if the current valuation has gotten ahead of itself.

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