Comment: Why I would not buy Tesla right now
Sure, Elon Musk is one of its kind and has achieved great things. I would never deny that. Peter Thiel once said „I would never bet against Elon Musk“. Though, Tesla is one of the most shorted stocks in the market and discussed controversially all around the globe.
Before we get into the details and discussing the reasons of a rather careful approach lets take a look at the chart.
During the last 6 month, the Tesla stock experienced large swings of fluctuations due to positive or negative news, i.e. the very bad behaviour of Musk during the Earnings call back in June 2018 or just most recently the announcement to go private at a price or 420$. However, what we can see since the price surge of early 2017 is that stock price is topping out at around 390$ and since then building a descending channel with lower highs and lower lows but, to be fair, a quite strong support line at around 280$. A warning sign?
TA is nice for getting a bigger picture of market sentiment, but let’s take a look at the current situation of Tesla and what are my reasons to stay away from the company right now. There are two concerns which belong to the management and the current development of the company itself.
Management
As I mentioned already, Elon Musk is a visionary and the heart and soul of Tesla. He grew the company to what it is today and ensures that long-term goals as well as strategies are in place and are going to be achieved. Though, when it comes to operational management flaws can be identified. Should a CEO really use Twitter to announce financially relevant topics? Tesla is facing an investigation by the SEC now because of the „going private“ tweet Musk published recently. The tweet caused the stock to jump up 11% since investors were hoping for a buy-out at stated price fo 420$. Musk said he is tired of the financial market and the pressure on him because of public investors. It seems like he is not in full control of his emotion. Another example is the mentioned earnings call where Musk just muted the analyst's questions.
Tesla is not the only company Musk is running (SpaceX + Hyperloop One) so he is exposed to a lot of pressure. But as a CEO you need to be able to assess if you are able to stand it all. In my opinion, that is a question mark right now.
Development
The company is still not profitable. That is concerning. Sure, manufacturing cars is a cost-intensive operation. But, the first announcement to be profitable within the next 6 month was already 2 years ago. Since then Tesla is desperate to grow production numbers. Indeed, revenue is growing constantly during the last years, but operating expenses are doing so, too. Bloomberg stated earlier this year that the car manufacturer has a cash-burn rate of 3.48 b$ p.a. or better 6.500$ per minute. Their debt amount is piling up larger and larger, especially due to the infrastructure requirements of Model 3 manufacturing. It is questionable if the profit from Model 3 sales are able to compensate for the initially invested money.
However, Tesla finally reached its goal to produce 5000 pieces of Model 3 per week. They set it as a mile stone in their Q2 Earnings update letter and indeed it is a silver lining. We will see how it is working out.
Conclusion
Buying Tesla right comes with immense uncertainty and quite a risky decision. Risk should come with potential. Tesla, in my opinion, is already quite overvalued due to the hype around Musk. Putting that together with the picture the stock chart is illustrating I would rather step back a little bit and wait for a more safe entrance (in case I would consider to buy). I do not say the company will not be successful. I think it is possible. Still though, we need to be rational to protect our hard-earned money. Let us give Musk and Tesla a bit of time to define the direction. What I want to add here as well is that their competitors are not sleeping. We see great Chinese solutions slowly preparing for the western market. Even the (slow) German manufactures have some great cars in the pipeline. It might be that Tesla has lost some of its first mover advantage.
Please let me know what you think of Tesla in the comment section below. It will be interesting to here your opinion.
Disclaimer: This is not financial advise. The Author owns no stock of named companies.
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