When a stock loses half its value in just 6 months, during a time when the market has put together a significant rally, and you’re still losing a lot of money, any ray of hope helps.
Tesla stock traded as high as $376.79 six months ago, but it has been on a steady journey down since. Many analysts continue to be bullish on it, and expected that, at long last, the company may start making money for the first time in its history.
Tesla did turn a small profit in the fourth quarter of last year, and although 2018 was yet another losing year, this did inspire some hope that things might be finally turning around. Tesla extended their potential market with the release of their relatively modest priced Model 3, and this was also expected to finally allow them to reach the promised land of making money for their investors.
Then this year’s first quarter earnings report came out, and it wasn’t a good one at all. Analysts expected losses but they got to see a lot bigger number than expected, and Tesla also let us know that the next quarter will be a losing one as well. Should this be the case, the dream of 2019 being in the black may quickly fall by the wayside, especially given the huge hole of $702 million that the first quarter put them in.
There is a lot of focus on revenues when people try to put a positive spin on a company that does nothing but lose money, as you can’t really focus on earnings, but increasing revenue will only help you if you have a positive margin. Tesla has done pretty well in the market that they are catering to, those who wish to own their cars at a lower margin than it would take for Tesla to break even. All we’re really seeing is a transfer of wealth from Tesla’s investors to the buyers of their cars.
Tesla has been keeping their boat afloat all this time by simply borrowing more and more money as these losses need to be funded somehow. The bond market doesn’t think a lot of the company’s health and future prospects, and this has led to downgrades and Tesla’s having to pay even more interest on their junk bonds.
Back in late March, Moody’s changed its outlook on the company from stable to negative. It’s hard to imagine anyone considering Tesla to be stable, at any time in their history, although they may be at a point where they are the least stable. Tesla was born out of a hope that the world will be ready for an all-electric car company at some point, but that was 16 years ago, and the clock will surely run out one day if things do not turn around.
The Model 3 Hasn’t Solved the Problem as Was Hoped
It doesn’t look like that time is now though, or perhaps even anytime soon. Now that it’s clear that the Model 3 won’t be the savior so many had hoped it would be, mostly because they aren’t charging enough for it to make ends meet, there’s not a lot left to pin our hopes on, and thinking that the new factory under construction in China might finally do it might even be grasping at straws.
The Chinese electric car market is a competitive one indeed, and it remains to be seen whether this can make enough of a difference to the company’s bottom line and get them out of the red finally.
If Tesla can finally put it all together, at least this would get them off of life support and then they can work on building on the success that got them there and look to go further. Not only is the clock not on their side when it comes to their financial health, once their much bigger competitors start rolling out all-electric cars, this could put them in a world of trouble and even eventually spell the end of the company.
Losing market share on cars sold below cost is not the concern right now though. The Model 3 may be a step in the right direction, but it has not delivered what the company really needs to survive and they likely are going to need to do even more to reinvent themselves, as their current stable just isn’t getting it done and may not down the road either.
In spite of all this, a lot of analysts remain positive about the company’s fortunes, even though it isn’t so easy to figure out how. Piper Jaffray’s Alexander Potter is certainly among the most optimistic, and he set a price target of $396 last October along with an Outperform rating. This was at a time where the stock had to make up about $100 a share to hit this.
Since then, Tesla has lost about $100, not gained it, and on Monday, it fell to $176.99, its lowest point since September 2016. Things have gone in the opposite direction from Potter’s prediction. Undaunted, he reiterated his Outperform rating and is still sticking to his belief that this stock is indeed headed to $396 a share, which would require that Tesla not only reverse its downward course but go on a real tear upward and roughly double its price from when he confirmed this rating this week.
Setting a price target 100% higher than where a stock is trading at is ambitious enough, but doing it with a company’s stock that has lost almost that much during the last 6 months, with no real reason to think that this won’t just continue let alone reverse, is something else altogether. Potter doesn’t really support his seemingly wild-eyed prediction with all that much substance, other than to tell us he believes that the concerns about Tesla’s declining demand are exaggerated.
He remarks that “we understand why some investors consider the stock un-investable, but of all the reasons to doubt our Overweight thesis, we think weak demand is the least convincing.”
Declining demand is not Tesla’s problem though, it is a lack of profitability. Tesla needs to figure out how to make money on selling their cars, regardless of how many they sell. If demand increases to the point where they could scale things up so significantly as to reduce their production costs below what they are selling their cars for, then we might have something to hold on to, but we are far away from this point now.
It’s not even a matter of needing to question his thesis, as reality appears to be enough of an opponent in itself, enough to send this idea to the mat. That’s exactly where it is right now, and something dramatic will need to happen for Tesla to double its stock price in the near future or even the foreseeable future, or to come close at all to realizing this inflated hope.
There’s Still Quite a Bit of Positivity Left, But for How Much Longer?
The average price target on the street is considerably more modest, at $275, but even that looks like quite a reach right now. The target right now needs to have them stay above $200, which they did successfully pass on the way back on Thursday, and hope that the next earnings report doesn’t disappoint badly enough to set them on another downward course to the $150 a share that some analysts are expecting.
Tesla looks more likely to go to $150 than to $275, and if this stock is Overweight, it is so on the short side, not the long side. $54 more down might seem like a lot, but Tesla really doesn’t have much to cushion further downward pressure, like a company who actually had earnings to stand on might, where their price might go down enough to the point where it started to look attractive.
Tesla is surviving on just hope right now and that hope has been waning at an alarming rate. Without enough investors clinging to enough hope, this stock really has nowhere to go but down.
This has been a good week for stocks though as the market has gotten excited about the prospects of a rate cut soon, even though that may be premature. The truth is that the Fed said they will do so if the situation warrants, if the tariff war causes enough damage that this will be needed, but right now this does not appear to be the case at all.
The economy has been holding up pretty well in spite of all this though, so the market may just be setting themselves up for a disappointment. When they do, Tesla will probably be one of the first stocks they will be looking to punish further.
We might want to get a little excited about Tesla’s adding almost $20 to their stock price this past week, we’ve seen this a few times during the stock’s 6 month run in the other direction. The fact that Tesla backed up a little bit on Friday during a strong up day for the market as a whole may suggest that whatever excitement that spurred this little two-day rally might be waning already.
Tesla is a stock that would benefit from a rate cut more than other companies, given that the debt millstone around their neck is becoming so heavy and the fact that they need to keep borrowing to stay in business right now.
This is still a stock and a company in trouble though, and as the months pass and the situation does not significantly improve, or do anything but get worse actually, this is not an environment where investors can be expected to put together the sustained love that a move back to even $275 a share or even close to that.
No matter what some analysts think, Tesla still looks pretty bearish from both a technical and fundamental standpoint, and there remains very little to like about it right now.