Wednesday, October 3, 2018

Sometimes companies are very complicated and investment decisions can be hard.  Sometimes not so much.

I have no intention to use this platform to suggest speculating on a company such as Tesla, but I have now spent a number of weeks going through the company balance sheet, the wide variety of product and competitive information that is available, and read a LOT of information written or said by, Elon Musk, the CEO as well as others who talk to him or about him.

The thrust of that is that this is exactly the kind of company that investors should not invest in.   That is not a statement about the product, or the excitement around their products, or any of that.   It is simply a statement that unless you are a gambler, you should have nothing to do with the company.

The broad reasons are as follows:

1 – The company is effectively bankrupt.   This may seem to be an extreme statement, but it is only made so because the CEO refuses to raise fresh capital.  The company can solve the problem by selling another $1-3 billion worth of shares to pay down the debt coming due very soon.  The problem is two fold.  First that the CEO explicitly stated that he wouldn’t need to do that and secondly that if (when in my opinion) that happens, the share price will likely drop by $50-150 dollars depending on market dynamics at the time.

2 – The product may be great, although there are plenty of stories suggesting some problems, but the thesis behind the company has three key aspects which are probably no longer true:

a)  They can produce a U$35,000 electric car.   This looks highly suspect, and in fact the $35,000 option was recently removed from the website and the ‘cheapest’ option now appears to be about $38,000.   That is like moving from a Toyota Avalon to a Toyota Avalon Hybrid.

b) The interest in the car may have been predicated on getting a $7,500 rebate from the government.  That $35,000 car looked almost affordable with a rebate of $7,500, however that rebate program began expiring on July 1, and by January 1, 2019 it will be just $3,750.  By January 1, 2020, it will be $0.   This will almost certainly impact demand.

c) There was simply no significant competition.  As of October 2018, the competition is still somewhat muffled but by 2020, there will be about fifty competitive vehicles, some at significantly lower price points, and some with more luxurious interiors to choose from.   This will certainly impact demand.

3 – The management is unstable.   That is a comment about Elon Musk, the CEO who has serious issues with credibility, but it is also a statement about the revolving door in the management suites that guide the operation that is Tesla.  A good leader is important, but a stable, dependable workforce keeps the business running and the number of senior leaders leaving the business give rise to significant risk.

Here is the chart for Tesla (TSLA) and if you look closely, it shows the volatility in share price, particularly in the past month, but also through the past six months.   This is not an investment, it is gambling.   There are other ‘green’ investments and companies with ‘high potential’ that offer a much better risk/reward profile.

20181003 - TSLA

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