Why Tesla never will be a good investment

The Tesla brand is a symbol of the transition from polluting gasoline consuming cars to electric and environmentally friendly cars in the mind of many consumers.

Analyzing the issues in quarterly sales

Tesla does not release this U.S. monthly sales as all other manufacturers do. They will only release global figures on sales at the end of each quarter. Tesla’s highest gross margin vehicles are falling in demand. Sales of the Model S were actually down from a year ago in first quarter 2017.

The elephant in the room remains the perpetual Model 3 problem. By the company’s own guidance, Tesla should be rolling out 10,000 Model 3s weekly for the mass auto market by now. Unfortunately, Tesla is nowhere near that. By some estimates, the company is at slightly over 1,000. But the company’s most recent data suggests that peak production is around 2,000 per week right now.

Regardless, Tesla is well below the revised 2,500 Model 3 per week estimates. Moreover, Tesla’s advertised $35,000 Model 3 is nowhere in sight, as the current “base” model will run consumers roughly $49.000.

It isn’t so much the issue of simply producing fewer cars or ramping up full production capacity slower than anticipated. The true problem lies in that Tesla is losing an exorbitant amount of money while the Model 3 production ramp-up lingers. Tesla lost approximately $2 billion last year.

What’s worse, $1.3 billion in losses came in the last 2 quarters of last year, right when Tesla was ramping up Model 3 production. Now the company is set to report another gigantic loss this quarter. At least $500 million in losses, some speculate Tesla’s Q1 loss can come close to $1 billion. (consensus estimate $545 million.) So, the key question remains, will Model 3 production continue to lose money?

Jon McNeill, prior to his departure in February, worked hard for six months to convert cars to cash with strong sales in the third and fourth quarters of 2017. This had a beneficial effect of reducing inventory by more than 6.000 units from a peak of nearly 9.000 units in Q2 in 2017. As you can see in the next chart, inventory is on the rise again – up 63% in Q1.

This chart raises another issue for Tesla. With global sales of Model S and X down over 6,000 units in Q1, why boost production of these cars by over 2,000 units in the quarter? Tesla’s growing inventory just ties up cash that is in short supply right now. Elon Musk, as the new leader for global sales and service, needs to start converting metal into cash. Before anyone asks, in-transit cars have already been subtracted from the excess inventory figures. Some of this excess inventory could be Model 3s presumably undergoing rework activity.

Tesla has placed all of its eggs in the Model 3 basket. If this less expensive car does not live up to the projected gross margins, Tesla will certainly run out of cash as some are predicting will happen in 2018.

You can see why rising inventory could pressure cash flow, a key reason why many are skeptical of the company saying it doesn’t need a capital raise outside of credit lines.

In the first six quarters after the Model 3 was unveiled in March 2016, the 3-month LIBOR rate rose by a little more than 70 basis points. In the two quarters plus these first few days of April since, it’s jumped another roughly 100 basis points. So even if Tesla doesn’t have an official capital raise, and just borrows further from credit and other loan facilities, the impact of higher rates likely means total interest expenses are headed towards $200 million per quarter.

Tesla will be hurt by the trade war between USA and China

Tesla is subject to the 25% Chinese retaliatory tariff designed to mimic the tariffs the US sought to impose on 1,300 Chinese goods, which is likely to influence the stock negatively.