Why Tesla Could Vanish This Year

If you think our national cricket team is under pressure, then spare a thought for Tesla’s CEO. Next week, Elon Musk has to front up and tell the world how many Model 3s the company has made.

Not sold, that is. For Tesla, that has been the easy part. Would be buyers have been happily slapping down deposits in droves.

The hard part for Tesla has been coming through with the goods.

The Model 3 is important to Tesla because it is the car that ‘Average Joe’ can buy. With a starting price of around US$35,000, the Model 3 is less than a third the price of Tesla’s higher-end vehicles.

Production numbers from Tesla have always been hard to determine. And the Model 3 is no different.

Since July last year, Tesla has twice had to cut production guidance. In November 2017, and again in January this year.

So enraptured has the market become by the number of Model 3s that Tesla is producing, that Bloomberg has even created its own Model 3 tracker.

Rather than rely on information from Tesla directly, Bloomberg’s tracker collects data on the number of VIN’s Tesla has registered.

The VIN is simply a vehicle’s identification number. All vehicle manufacturers must lodge them with their respective regulatory bodies. It’s also the number you can never seem to find when you ring up to insure your car.

Bloomberg is also using a second set of data. This relies purely on new Tesla owners informing them of their purchase. It also relies on the public contacting Blomberg with any new Teslas they have spotted. I guess some people have a bit of spare time on their hands.

To quote Bloomberg:

So far in March, Tesla has registered four batches (VINs) —enough to build 7,192 new Model 3s. Each batch of VINs was larger than the last, and the time between batches was shorter than we’ve typically seen so far. These are signs of progress.

Note that Tesla’s goal is to make 5,000 Model 3s every week. The great question now is, is it all too little, too late?

I bet other manufacturers would love to be in Tesla’s shoes. Who wouldn’t want a swag of customers happy to wait more than a year for their car?

For them, production is the main game. It’s what they do. They rely on their distributors and dealers around the world to sell their product.

The biggest challenge for Tesla is that it is still learning how to manufacture cars. People stuff up. And so do robots — they are, after all, reliant on the people who design them.

As the ongoing Takata airbag saga shows, even those who have been at it a long time can get it horribly wrong. 

EV market competition is ramping up

The other big challenge is that competition is on the way. Not from another start up, but from those with the engineering skills and scale to quickly ramp up production.

Like Volvo who announced in July last year that from 2019 onwards it plans to make only electric and hybrid vehicles.

And Mercedes-Benz, who announced in January that they plan to offer electric versions of all their cars by 2022.

For them, they already know how to make a car (and a swag of commercial vehicles). Dropping an electric motor and driveline into an existing model is less of a task than someone starting a car from scratch.

Mercedes-Benz’ parent company, Daimler, employs around 289,000 people worldwide. That includes tens of thousands of engineers, working on everything from the driveline, the suspension, through to rear view mirrors.

This is the kind of scale Tesla is going up against. Last financial year, Daimler made over 10 billion euros in profit. And even then, it warned that tough times could be ahead.

Compare that to Tesla who continues to burn up cash. The best news for them is that last quarter they burned up less cash than the previous quarter.

Despite that, its cash flow is still negative. Plus, they expect capital expenditure to be greater this year than last.

That means that Tesla will need to go to the market once again and raise more money — at the very time Moody’s has downgraded its debt.

The story of Tesla is an old-fashioned one. It’s a story of the head versus the heart. Supporters buy into the story for a lot of reasons.

Cynically, for some it might not be much more than ‘virtue signaling’. A car to show-boat in down their local shopping strip. Yet for others, they genuinely believe that by buying a Tesla they are helping to save the world.

Despite motivations, the overriding determinant of Tesla’s success, and survival, will be if it ever makes money.

In a bull market, companies like Tesla capture people’s imagination. Investors believe in the story, that the company will change the world. They line up to invest.

In a bear market, though, that all gets thrown out the window. Investors will want to see some real profits before they hand over their money.

Tesla has buried more short-sellers than just about any other stock. And if its results next week surprise to the upside, no doubt it will bury some more.

However, the toughest test for Tesla will be if, and when, it transitions from a ‘story’ to a manufacturing stock. That is when the market will judge it like any other stock.

All the best,

Matt Hibbard
Editor, Total Income

While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.

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