This week Tesla stock fell to its lowest levels since the beginning of 2017. The electric car maker suffers from political uncertainty regarding its prospects in China, as well as questions over Tesla’s ability to deliver on its premium stock valuation.
Last week, the company raised around $2.7 billion in convertible debt and equity (despite the promise they’ve made last year that they would not need to raise more money). The market has responded to this transaction noting that this was a necessary move for the company in order to alleviate fears of short-term cash flow issues and solvency. The raise is not necessarily a surprise at this point, but it does lend some concerns to the company taking on additional debt and subjecting shareholders to dilution of their shares.
Tesla also failed to deliver a profitable first quarter even though its CEO Elon Musk stated in a January investor call, that he was “optimistic about being profitable in Q1, and for all quarters going forward.” Musk has now pushed that forecast back to the third quarter.
Moreover, investment banking advisory firm Evercore ISI said that they believe that this catastrophe isn’t done yet and have lowered its stock price target to $200 from $240.
Consider Tesla’s enterprise value is $53 billion — far richer than that of other luxury original equipment-manufacturer peers like Volkswagen’s $36 billion, BMW’s $15 billion, and Daimler’s $27 billion, Evercore analysts led by Arndt Ellinghorst said. He added:
“The only thing that can justify such valuations is supernatural growth and best in class execution. Both are in question right now.
Tesla is a car company. It needs and burns cash like a car company. The longer questions around execution and growth persist, the more difficult the valuation is to defend.”
Evercore also lowered its delivery estimates across all models, along with revenue and earnings per share estimates for the next two years. That reflects the analysts’ belief that Model 3 volume could peak in 2020.
“Growth cannot stall for growth companies. We believe street estimates are way too high, and production shortfalls will continue through the year.”
For Tesla’s short-sellers, this situation is pretty lucrative since, according to the financial technology and analytics firm S3 Partners, they have netted more than $1.91 billion in mark-to-market profits by betting the company’s stock price would fall this year through April.
However, we shouldn’t forget that Tesla is also a huge innovator making major long term bets on emerging technologies for which the markets and supporting infrastructure have not yet grown to scale. That kind of intensive strategy can lead to massive profits in the long term when executed competently by a large company with a strong brand and commanding market share.
Also, last month Musk announced that the company had designed a self-driving chip and would soon launch a “robo-taxi” so its autonomous cars could ferry around paying passengers, no owner/driver necessary. That would make every Tesla an “appreciating asset,” he said. Tesla plans to join the ride-hailing business as soon as 2020 with Elon Musk saying the owners whose cars participate in the Tesla network will keep up to 75% of the generated revenue.
T. Rowe Price Sells Most of Its Tesla Shares
In the meantime T. Rowe Price Associates Inc. (TROW) sold more than 81% of its shares of Tesla Inc. over the first three months of the year, marking a sharp retreat for a firm that for years had been one of the electric-car maker’s biggest investors.
The fund manager held 1.7 million Tesla shares as of March 31, down from 8.9 million shares at the end of 2018, according to a Wednesday filing with the Securities and Exchange Commission.
Because TROW runs both actively managed and passive funds, analysts think that some of the decline in holdings may have been caused by money flowing out of funds rather than reduced positions.
Even as TROW steps back from TSLA, it has continued to pump money into potential competitors in the race to develop autonomous vehicles, including an equity investment in GM’s Cruise driverless car unit.