Since Tesla shares hit a high of $385 on 18 September 2017 the stock has been under pressure and closed this week just above $340 a share. In all honesty there are many analysts waiting for the company to trip up and “reveal its true colours” but serial entrepreneur Elon Musk has a tendency to surprise on the upside hence the stocks strong retail following. However, now that the company is approaching mass market, with its new Model 3 vehicle, is cash flow becoming a major problem?
Slight disappointment with electric truck
When the Tesla share price seemed to be wobbling just a few weeks ago the company teased investors suggesting that September would see the unveiling of a new electric vehicle, a truck. Since then the company has been forced to amend the timescale with an October unveiling now expected – which did not go down well with analysts. While the company has, like so many others, disappointed on numerous occasions in the past many analysts are concerned about the delay.
Sometimes we expect too much of companies such as Tesla which are innovative and groundbreaking in their forward thinking. Let’s not forget that Elon Musk ran with his electric vehicle idea when all around him were negative and sceptical to say the least. As he stands on the verge of crashing through the mass market barrier surely he should be given some credit?
Cash burn
Cash burn has been and will be, for some time to come, a real problem for Tesla and the recent ramping up of production for the Model 3 could be a challenge. In some ways the company cannot win with investors and analysts because a lack of investment in manufacturing would delay delivery of those who have reserved their vehicles yet the company invests in manufacturing to meet demand and is still criticised. We do know that the company will need to return to markets in the short to medium term for additional funding but if this long-term investment will yield returns there should still be a healthy appetite amongst investors.
However, analysts at Jefferies this week started their coverage of Tesla suggesting the company will not break into profitability until 2020 at the earliest. This is a full 12 months more than the consensus view while on the flipside of the coin Morgan Stanley is positive on the company suggesting there will be millions of Tesla vehicles on the road in the next few years. Interestingly, Morgan Stanley also highlights potential revenues going forward relating to data gathering and machine learning training.
High risk/high return
Traditionally as a company grows older the risks tend to fall and it is easier to look forward with confidence. The situation with Tesla is slightly different because the share price is already factoring in long-term success for the company hence the high risk/high return ratio is probably abnormally high. In reality there is little room for disappointment in the current share price and, as we saw, a one-month delay in revealing the company’s new electric truck seems to have spooked some investors.
However, we say this time and time again, it takes a brave person to bet against Elon Musk, a man who has been there, done it and risked his own money.