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Tesla’s ‘transformative year’ is hitting a brick wall

Investors who believe the company is overvalued note that when tax subsidies are lifted Tesla sales drop

Image Credit: AFP
A Model 3 sits on the showroom floor at a Tesla dealership on March 30, 2018 in Chicago, Illinois.
Gulf News

In February, Tesla said 2018 would be “a transformative year for us.” But the transformation so far is probably not the kind the company had in mind.

The company’s stock tumbled after a person died in a Tesla Model X that crashed and caught fire on March 23. Then on Tuesday March 27, Moody’s downgraded the company’s credit rating, noting that Tesla was burning through $2 billion (Dh7.34 billion) of cash a year and would have to raise more.

On the morning of Thursday March 29, Nomura Instinet analyst Romit J. Shah, the most optimistic of those following Tesla, reduced his robust target price to $420 a share, a $80 cut. “As long as they can avoid a recall that would damage the brand then I think they’re going to persevere,” he said in an interview Thursday.

Five hours later, Tesla recalled 123,000 of its Model S sedans built before April 2016 after discovering that corroding bolts in cold-weather climates could lead to a power-steering failure.

The recall covers nearly half the cars Tesla has ever sold. The company said it acted proactively and that the defect had not caused any accidents or injuries.

After two days of sharp downturns, Tesla stock closed at $266.13 a share that day, up 3.3 per cent. The recall erased that gain in after-hours trading.

Behind it all stands Elon Musk, the tireless salesman and visionary who has captured the imagination of investors for everything from a super-fast underground hyperloop to space voyages to Mars.

But Musk is struggling with the more prosaic mission of assembling a passenger car here on Earth. And in explaining a series of production misses over the past two years, some analysts say Musk has undermined his own credibility by repeatedly overpromising.

In May 2016, for example, he said in an earnings call that “as a rough guess” Tesla would “aim to produce 100,000 to 200,000 Model 3s in the second half” of 2017. Model 3 sales in that period totalled just 1,770.

Then in August 2017, Musk said “we remain, we believe, on track to achieve a 5,000-unit week by the end of this year.” He added that “what people should absolutely have zero concern about is that Tesla will achieve a 10,000-unit production week by the end of next year.” By October, Musk said that ramping up was “manufacturing hell” and that the company’s current forecast is for 5,000 Model X vehicles a week by the end of June. Investors are waiting to see the actual results.

“The company’s continued production delays since the launch of the Model 3 represent significant variance from original expectations,” Moody’s said in its downgrade on Thursday. “Tesla’s ability to meet updated weekly production targets of 2,500 by the end of March and 5,000 by the end of June will be a critical factor in assessing the company’s manufacturing capabilities and credibility in achieving production forecasts.”

Finance expansion

In October 2016 and March 2017, Musk played down the likelihood that Tesla would need to raise money to finance its expansion. Tesla ended up raising $3 billion in 2017, more than half of it in bonds now rated as junk.

To some investors, Tesla is a classic case of hype. Founded in 2003, it has not turned a profit. It has relied heavily on a California zero-emissions scheme that in 2017 amounted to a $280 million subsidy. For all the hoopla surrounding Musk, Tesla sold just 50,145 cars last year, amounting to 0.29 per cent of the US auto market. Yet its market capitalisation, even after a rotten week of trading, still falls just short of General Motors’, which last year sold 3 million cars in the United States — and earned $12.8 billion excluding one-time items.

Tesla’s rapidly growing revenue — $11.7 billion last year — has been propelled by generous tax breaks on federal and state levels. But investors who believe the company is overvalued note that when tax subsidies are lifted, as they have been in Georgia, Hong Kong and Denmark, then Tesla sales drop.

Although the tax bill signed by President Donald Trump preserved the $7,500 federal tax credit for purchases of electric vehicles, the tax credit begins to phase out after a company sells 200,000 electric vehicles — a threshold both Tesla and GM expect to reach this year. That will not only reduce incentives to buy a Tesla or GM, but it will also put Tesla and GM at a competitive disadvantage with manufacturers such as BMW, Volkswagen and Volvo that are well below that threshold.

Looming competition

While Tesla will, even if tardy, ramp up its capacity, Moody’s warns of looming competition in the electric vehicle market. At least 36 new electric vehicles will be launched by traditional carmakers by 2021. Moody’s said that Tesla holds “no sustainable technological advantage; essentially all of the technologies incorporated in Tesla vehicles (or some similarly effective alternative technologies) will likely be available to competitors.”

Bottleneck

Yet to others, Tesla is the tech giant of the future. Shah, who follows Tesla for Nomura Instinet, is a tech analyst, not an auto industry analyst. He compares Tesla to Intel in the 1990s, when there was a bottleneck in microprocessors that Intel resolved. And he says that the consumer appetite for a new Tesla car model — with thousands lined up for hours to put down advance deposits — rivals consumers’ interest in early iPhones. And so Shah compares Tesla to Apple, Intel, Nvidia and Google, not to Ford or GM. He measures the stock price as a multiple of revenue, and he says no car company has revenue growing like Tesla’s.

Roughly 400,000 people have put down $1,000 deposits for the car, but whether Tesla can stake out a bigger portion of the middle-income car market remains unclear. It certainly won’t be able to without ironing out production glitches. Moody’s expects Tesla to manufacture no more than half the Model 3s it originally promised to make in 2018.

One potential rival is Chevrolet’s Bolt EV. GM sold 23,000 of the Bolt in 2017, even though it went on sale in all 50 states only halfway through the year. It’s the only car other than Tesla’s to break the 200-mile range barrier. And it does it at a much more affordable price.

But the people who have driven up the value of the company into the league of Ford and GM expect much more from Tesla and Musk.

“I think he and what he’s created is amazing,” Shah said, “and I just don’t think you can bet against them.”

Asked whether Tesla might simply turn out to be a profitable niche carmaker, Shah disagreed. As he put it: “Something tells me they’re either going to go to the stratosphere, or they’re going to go to the basement. The outcomes are going to be binary.”

—Washington Post

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