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Tesla Investors Are Losing Patience

Robert Rapier

I have covered advanced biofuel companies for more than a decade, and just about all of them made implausible claims about their technologies. They consistently overpromised and underdelivered, until they finally ran out of money and declared bankruptcy.

I am not sure that electric vehicle (EV) maker Tesla will share the same fate, but management is demonstrating the same pattern. Tesla CEO Elon Musk frequently says grandiose things to investors that ultimately fall far short of his projections. Thus far, this tactic has helped to prop up Tesla’s share price.

I previously covered Tesla’s second-quarter earnings in Tesla Shares Surge Following Its Largest Loss Ever. Tesla reported a record loss, but Tesla CEO Elon Musk has an uncanny way of reassuring investors that everything is just fine. As he did so in the previous earnings call, Tesla shares moved higher.

But investors may finally be running short on patience. Last week Tesla reported a new record loss of $619.4 million for the third quarter, almost double the previous quarter’s record $336.4 million loss.

Things got really interesting on the earnings conference call. Musk had a difficult time reconciling optimistic statements he had made following the previous quarter.

Just to highlight one example, during the previous quarter’s conference call, Musk had stated: “What people should absolutely have zero concern about, and I mean zero, is that Tesla will achieve a 10,000-unit production week by the end of next year.”

Zero concern. That’s a statement of absolute confidence, and Musk’s credibility should be judged on such statements. But when questioned about the previous claim by analyst Ryan Brinkman from JPMorgan Chase, Musk replied that it is now “a bit too early” to make such a forecast, adding:

“But I mean, if you extrapolate from 5,000 units towards the end of Q1, we do want to call upon significant CapEx until we are confident about cash flow on Model 3, so then that’s a question of how long it takes to implement. I mean, that’s where you get to 10,000 units a week for Model 3, which is a number we are confident can be sustained from a demand standpoint.”

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So the absolute confidence of 10,000 units a week has now turned into “we need significant capital.” Another example of overpromising and underdelivering. This is significant because those colossal production projections are mainly what supports Tesla’s lofty valuation.

Tesla’s share price, which had risen above $380 in the weeks following the second quarter results, began to fall leading up to the release of third-quarter results. Following the release, the share price briefly dropped below $300 for the first time in five months but has since rebounded back to ~$315.

One more significant risk factor looms for Tesla. Electric vehicles are currently eligible for a $7,500 federal tax credit. But the tax bill that is being pushed by Republicans with support from the President would eliminate that tax credit.

If Congress eliminates the credit, it will prompt some Tesla customers to request a refund of the $1,000 deposit they previously put down to reserve a Model 3. If too many customers do this, it will put Tesla in a precarious financial position. Of course, it will also effectively hike the price of the vehicles, which will impact demand.

Many analysts have made the case that Tesla is fundamentally overvalued, but it has long been a cult stock whose value is strongly influenced by the personality of its CEO. Shareholders are also confident that the future will be electric, and Tesla will be an industry leader.

I agree that EV sales will grow rapidly for many years, but Tesla faces numerous challenges — one of which is increased competition in the space. They are facing a cash crunch, and they will not be able to fund growth from cash anytime time soon. That means a heavier debt load, and/or issuance of more shares.

Nevertheless, cult stocks are risky shorts. These companies can trade at irrational values for a long time. Tesla can reverse direction quickly based on the optimistic projections of Elon Musk. Of course, it won’t be that way forever. Eventually, the company has to deliver in a big way, or its value is going to be sharply reduced.

By Robert Rapier

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