Is Tesla in trouble?

Elon Musk is still the darling of the electric vehicle market but it would appear that his company, Tesla, is in trouble. Just last week the company reported a massive $619 million third quarter loss and despite targeting the production of 5,000 Tesla Model 3 Sedans a week in 2017, the company will be well short of this figure. There are serious concerns that Tesla is struggling, will be left behind by the competition and could ultimately fall by the wayside.

Demand exceeds production

After the company released the first “affordable mass-market” electric vehicle in March 2016, the Tesla Model 3, the pre-orders began to flow. It is believed the company now has in excess of 500,000 pre-orders although hopes of producing 1,500 units in the third quarter of 2017 were dashed when the company confirmed just 260 Tesla Model 3 vehicles had been built. The problem seems to be on the production line with an overreliance on handmade parts prompting the company to spend a rumoured $10 million buying a private machining firm.

Is Tesla in trouble?
Is Tesla in trouble?

While the price for the acquisition of Perbix, which has been a partner of Tesla for approaching three years, has not been officially confirmed it is believed that around $10 million of Tesla stock was registered in the name of James S Dudley, the owner of the company. This means that Tesla should be able to create an automated system to produce the troubled parts which have previously been made by hand. If this is the end of the company’s troubles in relation to the Tesla Model 3 there is no doubt this $10 million investment will pay for itself many times over. But is it?

Tesla share price in trouble

The Tesla share price has fallen dramatically over the last six weeks equating to a $15 billion fall in the value of the company. Even though the group still has a market cap approaching $50 billion the share price is currently hovering just over $300 against nearly $400 in September. It is fair to say that a lot had been taken on trust with regards to Tesla’s production numbers and it was only just a few weeks ago that analysts were increasing their expectations for the company. So, a significant drop in the production figures for the Tesla Model 3 could put analysts forecasts back many months.

Over the last 12 months Tesla has raised several billion dollars from investors to complete a massive production plant in China and also acquire SolarCity. An investment in the company has not been without controversy because Elon Musk and his cousins were in charge of SolarCity. They saw their SolarCity bonds redeemed early with full interest and there options converted into Tesla stock. So far the promised synergies, and on paper they did make perfect sense, have yet to materialise. Many analysts believed that the SolarCity merger with Tesla Motors was the make or break moment for Elon Musk. News of disappointing manufacturing numbers for the Model 3 are also putting more pressure on the entrepreneur.

Institutions jumping ship

Recent data from the US stock market shows that institutions have been selling Tesla stock into strength on the back of the Tesla Model 3 presentation in 2017. Institutions now hold just 58% of the company’s stock which is a significant drop from the 73% high back in 2013. It is also believed that a number of investors have taken “sell options” on the stock allowing them to make money if the stock price falls.

As Elon Musk still holds a large number of Tesla shares, with others in the hands of safe institutions, there is a limited free float of shares. This means that the share price movement is often exaggerated on the upside and the downside depending on whether buyers or sellers are in control. At this moment in time it looks as though the share price is headed sub $300 and with perhaps limited good news on the horizon this downtrend could continue for some time to come.

Conclusion

No stock in the history of stock market trading has polarised analysts to the extent which Tesla has. Critics believe the company is founded on vague promises; jam tomorrow forecasts and will never deliver sustained profitability going forward. Others believe the company is revolutionary, will take electric cars to the mass market and should be looked on in the same manner as Apple in the mobile phone industry.

One thing is certain, Elon Musk is not a man to sit back and wait for things to happen, he has already spotted the production issues, taken limited action so far but is unlikely to take his foot off the gas. There may be a problem if the company requires additional short to medium term finance. Tesla has already tapped investors for billions of dollars over the last 12 months and failed to deliver on promises made at the time. It is far too soon to write off Tesla but there is no doubt the company is pushing the patience of even its most loyal investors to the limit.

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