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The Zacks Analyst Blog Highlights: Tesla and Twitter

Zacks Equity Research
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For Immediate Release

Chicago, IL –September 12, 2018 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Tesla TSLA and Twitter TWTR.

Here are highlights from Monday’s Analyst Blog:

Is the Latest Dip in Tesla (TSLA) Shares a Buying Opportunity?

Tesla shareholders have had a roller coaster ride of late, though mostly headed down…

And there’s reasonably good reason for this too (tied to its eccentric, outspoken and unconventional CEO).

The entire PR machine is in fact geared to serving Elon Musk, whose energy and initiative are the main driving forces behind the company’s progress toward production and other milestones.

This has made his name synonymous with the company he helped create, while relegating to the background all the other people that supported him. It’s also meant an overly publicized production schedule and yo-yoing sentiments, as targets were missed or met (we haven’t seen any above-target performance yet).    

He also took to Twitter to tell people that he was taking the company private, only to backtrack on that a few days later. The result: Musk (impact on Tesla from this may be limited) is being investigated by the SEC for misleading investors.

For good measure, he recently used a TV show to smoke some “legal” weed.

So just when you’re thinking, the PR can’t get worse, the unpredictable CEO takes it a step further.

Musk’s personality may be charismatic and add to the charm of owning a Tesla, but investors typically like to be able to predict things. Similarly, employees can achieve more with a stable environment at work. And it doesn’t help that an entire company seems to be dancing on one man’s whims.  There have been suggestions that the company may be better off without Musk, but he doesn’t seem to agree.

So what if anything can be the impact of the PR fiasco, executive departures, SEC investigation and personal digressions of the CEO on the company? And how achievable are the goals/targets it has now set for itself? These are the main questions for investors at this point.

The company says it will be cash flow positive by year-end (earlier the target was by the third quarter. So let’s see if its operating metrics look like they are headed in that direction-

The top line first-

Revenues have been growing steadily over the past two years (up 215% between Jun 2016 and Jun 2018).

COGS has grown 240%.

OpEx has grown 142%.

As a result, the loss before interest and tax is up 268%.

From this, it’s clear that for Tesla to generate profits, the rate of increase in COGS has got to come down, which is unlikely to happen during a product ramp. It won’t be until the Model 3 process matures and volumes pick up significantly that this will happen. Doesn’t matter what Musk says.    

Then there’s the cost of financing (interest), which has also been mounting over the last two years (up 256%) even as the debt level grew 258%. While the company appears to have taken on additional debt at favorable interest rates, the situation could change if it loses key people that can generate the required results.

There’s over $2 billion of current maturities and Tesla needs to refinance at attractive rates. Also note that the debt/cap ratio, at 71.1%, is too high.

Conclusion

Elon Musk has set some lofty targets for Tesla and there’s reason to believe that the company will eventually get there. The highly automated assembly lines also indicate that the ramp up will probably be faster than for traditional car makers. But profitability and positive cash flow don’t appear to be on the horizon, at least not in 2018.

That being said, everything is going for the company in terms of demand and market opportunity despite the constantly increasing competition. So if you’re willing to wait it out a bit, the picture should be much clearer in another six months. And to be honest, we shouldn’t be looking at Tesla on a quarter-to-quarter basis but rather how those quarters are adding up. And they seem to be adding up rather well for now.

Recommendations                                                                                                  

Tesla shares carry a Zacks Rank #3 (Hold). For better opportunities, see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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