Tesla is leading not only the electric vehicle revolution but also the battery storage technology. In some of Tesla’s flagship vehicles such as the Model S and Model X, the sophisticated powertrain produces the fastest electric cars in the world. Furthermore, Tesla has developed the most advance battery technology to power all its electric vehicles. The Model S and Model X are touted to have the longest travel distance in the world at 391 miles and 351 miles respectively, in a single battery charge.
It may look like that Tesla is going to become the next Apple or Google. As such, it may seem like a no-brainer to buy Tesla stocks when the company is still young and the stock price is still low. However, there is significant amount of risk associated with investing in Tesla’s stocks. The following paragraphs list out several risks of investing in Tesla’s stocks.
Risk 1: Tesla has not been consistently profitable
One major setback in Tesla is the fact that the company has not been consistently profitable since its initial public offering (IPO) in 2010. According to the 2019 annual report, the accumulated loss incurred by the company as of December 31, 2019 was $6.1 billion. The net loss before interest expenses and taxes in year 2017 alone was $1.63 billion, which was the largest since its IPO, as the company was ramping the Model 3 production.
However, Tesla was able to reduce losses before interest expenses and taxes in subsequent years in 2018 and 2019 to -$388 million and -$69 million, respectively. While the company had successfully improved its operating profits by having smaller losses, the results still represent 3 consecutive years of losses which was still pretty awful, not to mention the losses that the company had incurred prior to 2017.
Moreover, Tesla has also consumed large amount of cash as working capital and capital expenditure during its business operations as seen from this article: Tesla cash flow analysis. The amount of cash spent was way more than the cash generated from the business operation. Over the years, Tesla has been largely resorting to stock issuance and debt offerings to fund its business operations. Without which, Tesla will certainly run into liquidity problems in no time.
Risk 2: Tesla does not pay a dividend
While most major automakers such as General Motors and Ford does pay a dividend, it’s a different story when it comes to Tesla. For your information, Tesla has never declared nor paid any dividends since its IPO in 2010.
Tesla has consistently suffered losses and generated negative free cash flow over the years, resulting in its inability to pay any dividends now and in the foreseeable future.
Furthermore, with all the debts that the company has been carrying, there are certain restrictions bounded by these debt covenants as to how the company is allowed to distribute its profit (if Tesla ever makes one) such as in the form of a dividend.
Not until the company can consistently make a profit and generate substantial amount of free cash flow, existing shareholders can only hope for Tesla’s share price to appreciate in the future instead of a dividend payout from the company.
Risk 3: Tesla is counting on only one product for growth
As of this article was published, Tesla was still relying on its flagship vehicle, the Model 3, as its major growth driver. Other than Model 3, the company has no other major products that can generate the kind of mass adoptions that Model 3 can achieve. Yes, the Model S and Mode X are sophisticated all-electric vehicles but these models are far too expensive for the mass market.
Moreover, Tesla has recently unveiled the Model Y which is a 7-seater cross-over that looks like a SUV and is touted as the game changer for the company. However, Tesla has only started to accept the order for Model Y in Q1 2020 and began production by the end Q1 2020. I doubt that this could happen anytime soon judging from the COVID-19 outbreak that has ravaged the automotive industry in recent months. Besides, the delivery for Model Y is still an unknown.
Not until there is evidence that suggests the Model Y is accepted by the market for mass adoption, the fate of Model Y, whether it will be another game changer for Tesla or simply just another pretty face that will only sit in the showroom, will remain as a big question mark to investors.
For all the reasons discussed, Tesla is still pretty much relying on Model 3 for growth as of Q1 2020 and possibly into the end of 2020.
As shown in the this article, Tesla’s vehicle deliveries, Model 3 delivery as of Q1 2020 made up more than 85% of total deliveries which means the bulk of the revenue came almost entirely from Model 3 delivery alone.
This makes the growth of Tesla extremely vulnerable to Model 3. The result shows that Tesla is basically counting on only one product which is the Model 3 for growth. The risk here is that any mishap to Model 3 such as a product recall or a change of consumers’ perception towards Model 3 would definitely spell disaster for Tesla.
Risk 4: Tesla can go bankrupt at any time
Tesla’s mounting debts can cause the company to possibly go under anytime soon if it can’t service its debts due to unforeseen circumstances such as failure to obtain external capital injections or deteriorating market condition.
As shown in this article, Tesla’s debt, Tesla has more than $12 billion of debts as of 4Q 2019, including scheduled interest expenses and nearly $16 billion of debts when lease obligations are included.
According to the 4Q 2019 annual report, Tesla’s expected debts repayments in 2020, excluding purchase obligations, totaled $2.5 billion which means that Tesla needs to have a minimum of $2.5 billion of cash throughout 2020 just to repay its debts.
Fortunately, Tesla has more than $6 billion of cash on hand as of 4Q 2019 according to this article: Tesla’s cash position. The $6 billion of cash should be more than enough to cover the expected cash outflow for debts repayment in 2020. However, most of Tesla’s cash does not come from its business operation as the company has been consistently consuming more cash than it can generate. Instead, the company relies on capital injection through stock issuance, debt offerings and credit facility.
While a capital raise through external sources is a normal business practice, it’s very risky for Tesla as the company has solely relied on external capital as its only source of funding for its business operation all this while. Failure to obtain the required capital will certainly push the company into immediate bankruptcy since its business operation has been unable to consistently generate positive free cash flow.
Tesla has been a great company and in fact, one of the best in class in the automotive industry. The company has been producing some of the best products in the world, especially the all-electric vehicles that definitely turn heads whereever they are passing by.
However, a great company does not necessary mean a great investment especially for Tesla. There are many aspects that potential investors need to look at such as profitability, cash flow and business prospects before deciding on the investment.
For a growth company like Tesla, there are many risks associated with buying the stocks and these risks have been laid out in the discussions above. As such, defensive investors especially retirees, who are primarily concerned with protection of principal, should probably take a pass on Tesla’s stocks.
References and Credits
1. All images and financial figures in this article were obtained from Tesla Quarterly and Annual Reports.
2. Featured images in this article are used under creative commons license and sourced from the following websites: Maurizio Pesce.
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