Model X, © Tesla

Many big boys – as the leading US investment banks are called – have given Tesla an unquestionably positive rating. CEO Elon Musk understands how to polarize as well as convince analysts, but at the end of the day only hard facts count. The Credit Suisse analyst specializing in the field already expects a profit of US$ 4.00 per share for fiscal year 2016, since there had allegedly been so many orders for Model X, which would impact earnings. The consensus, however, is at around US$ 1.85 per share – whereas all numbers for 2015 had to be corrected downward over and over again, which I believe will be the case in 2016 as well. There are too many unknowns which do not originate in the number of sold cars – especially regarding the new Model X – but in the costs for building the Giga factory for batteries.

Other analysts (Barclays Bank) expect before any earnings first another huge demand for capital, up to US$ 11 billion, in order to position the company on the market. The mass production of a cheap purely battery-driven car in 2017 requires massive investments that need to be considered in any assessment. My concern: If the estimated sales figures do not meet the expectations of Wall Street, the break-even point is reached later than expected or the company even incurs losses in the meantime (still high outflow of capital), the next capital increases will become increasingly hard to implement.

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Consider: Tesla has already been rated quite generously at almost US$ 30 billion. Additionally, the company will find it impossible to keep its unique selling points and the positive first-mover effect in the near future. The competition in this high-price e-car market hasn’t fallen into a deep slumber, but is expected to steadily chop away at Tesla’s lead and offer many alternatives (plug-in hybrids, fuel cells). That Tesla is planning an inexpensive mass-market product or vehicle for 2017 should be taken with a grain of salt, since many other manufacturers have already been offering their electric cars in this market or segment and are, of course, working on such things as extending the range of the vehicles, so that Tesla may find it difficult to gain larger market shares from the get-go.

In short: The stock price of Tesla may very well increase by a significant margin, which is a result of the news of the day. The interest of large investment banks to present an “enhanced” picture of reality, in order to pave the way for more capital increases should not have one overlook the fact that the stock price is subject to high fluctuations if less positive or even negative news come in. Currently, I see the share price to already incorporate all good and expectedly good news. For example, it is said that 17,000 to 19,000 units will be sold in the fourth quarter!? We will be able to see the actual figures at the end of February this year.

Doubts are also still lingering from the news that Tesla purchased 2,500 license plates in Denmark, although it could not be said for certain whether the company had also had buyers for all of these cars. Is this about a resale with high exceptional earnings, because the tax-related subsidies there will run out at the end of 2015?

Even if Tesla has a well-founded explanation for what it did, something like that will stick, and the question arises why Tesla had done it at all. And: The competition is closing the gap. Porsche is planning an electric car with the work title Mission E, which is said to have a range of 500 km and can be charged up to 80% within 15 minutes, possibly by an induction coil, i.e., charging without any distracting cables. I think every luxury car manufacturer will follow Porsche’s example and enter the electric car market as well as offer alternative hybrid solutions (fuel cell and battery).

My skepticism – and that has to be made clear – is based not so much on this beautifully designed car or on the new SUV Model X, but rather on the stock price and the criteria and arguments accompanying the company value: Of course, it is advantageous to avoid power costs as a Tesla user, since it directly impacts operational costs and replaced gas. But the question is how high the resale value of such a car might be and when the battery (especially because of the fast charging) has to be replaced (costs for Tesla!). And then there is the Giga factory: Whether Powerwall (for households) or Powerpack (for grid stability) – does the giga-mania really justify such a stock price? At full capacity, Tesla’s factory would be able to cover probably 80% of the demand for lithium-ion batteries around the world. But the prices of these batteries are falling. How high will the profit margin be in the end? A total value of US$ 30 billion seems to be quite the enthusiastic assessment here (60% of what GM is worth), even if analysts see the shares rise to US$ 400 and more.

Last but not least, I wonder why Tesla is reporting so elaborately for all the public to read how it acquires its supplier contracts to provide the required battery silica. There is mention of a new company in Nevada and also South-American companies, such as Codelco (Peru/Bolivia) or Li3 Energy (Chile). I urge caution, since such important supplier contracts should have been made a long time ago. Or did Tesla speculate on better contract terms and wants to pit one supplier against the other? Everything is possible! Finally, Tesla has also lost top talents – such as the manager of the Autopilot division, who left the company for Google – and a lot of employees went to Apple. Quo vadis, Tesla?

Risk warning
Investors must understand that buying and selling shares is done at their own risk. Consider spreading the risk as a sensible precaution. The fuel cell companies mentioned in this article are small and mid-cap ones, i.e., they do not represent stakes in big companies and the volatility is significantly higher. This article is not to be taken as a recommendation of what shares to buy or sell – it comes without any explicit or implicit guarantee or warranty. All information is based on publicly available sources and the assessments put forth in this article represent exclusively the author’s own opinion. This article focuses on mid-term and long-term perspectives and not short-term profit. The author may own shares in any of the companies mentioned in this article.

Author: Sven Jösting