Tesla Motors, Wall Street Hype or a Real Car Company?


The CEO of Tesla, Elon Musk is a visionary but can he turn his vision into a real car company? It’s crunch time for Tesla Motors. The Silicon Valley automaker is losing more than $4,000 on every Model S electric sedan it sells and it burned $359 million in cash last quarter in a bull market for luxury vehicles.

Musk has taken investors on a thrill ride since taking Tesla public in 2010. Now he’s given himself a deadline, promising that by the first quarter of 2016 Tesla will be making enough money to fund a jump from making one expensive, low volume car to mass producing multiple models, and expanding a venture to manufacture electric power storage systems.

Traditional automakers consume cash to pay for assembly line equipment, including metal dies and plastic molds, as well as testing to meet safety and emissions standards. A typical new car can cost $1 billion or more to engineer and bring to market.

Tesla has just $1.15 billion on hand as of June 30, down from $2.67 billion a year earlier. Established automakers such as General Motors has more than $28 billion in cash equivalents as of June 30. GM sells more than 9 million vehicles a year, while Tesla plans to build between 50,000 and 55,000 cars this year.

Tesla is going to be burning through cash for the next few quarters and for the next couple of years. There is no other way to grow as an automaker without investing in more infrastructure. Tesla will have to raise more cash in order to build more cars.

Tesla Press Release:

PALO ALTO, CA — 08/13/15 — Tesla announced today that it intends to offer, subject to market and other conditions, $500 million of additional shares of common stock in an underwritten registered public offering. In addition, Tesla intends to grant the underwriters a 30-day option to purchase up to $75 million of additional shares of common stock.

Elon Musk, Tesla’s CEO, intends to purchase $20 million of common stock in this offering at the public offering price.

Tesla intends to use the net proceeds from this offering to accelerate the growth of its business in the United States and internationally, including the growth of its stores, service centers, Supercharger network and the Tesla Energy business, and for the development and production of Model 3, the development of the Tesla Giga factory, and other general corporate purposes.

Wall Street loves stocks like Tesla that require more cash in order to fulfill their vision. New shares being issued means more underwriting fees for their brokerage businesses. Wall Street has had a history of selling “The Dream” but what about reality? If electric cars are to help solve the world’s carbon emissions problem, there needs to be a fundamental revision of electricity production.

clean energy

Electric cars are only as green as their power grid

More than two-thirds of global electricity production still comes from fossil-fuel powered plants. America’s electricity is still mostly coal-fired, with natural gas being a close second and nuclear a distant third.

In China, the grid is said to draw upwards of three-quarters of its power from fossil fuels. Mostly coal, which has heavy pollution problems. The U.S. is second only to China, in annual carbon dioxide emissions from the use of coal.

Researchers Bjart Holtsmark and Anders Skonhoft recently noted, “Indeed, the pollution from power stations is so dangerous and so widespread that even electric bicycles, of which China has 100 million, are only a fraction more environmentally beneficial than gasoline-driven cars.”

If you are Canadian, you may remember Ballard Power located in Burnaby, British Columbia that was going to revolutionize the automotive business. They built a fuel cell that would consume hydrogen, produce electricity and fit in a car.

Wall Street sold “that Dream”, the stock chart below shows the rise and fall!


In my humble opinion, investors who own Tesla shares should be worried. Profit margins in the automotive manufacturing business are very slim. It requires a lot of capital spending to get plants up and running. Tesla will have to continue to sell shares in order to raise money to fund increases in auto production. Selling more shares makes your current shares worth less over time.

No matter how you look at it, Tesla shares are way overvalued compared to other auto manufacturers. The concept of everyone driving an electric car is very appealing. However, realistically we are decades away from reducing the number of gas guzzling automobiles.

In my experience, overvalued stocks can continue to maintain their upward momentum. You will never get a clear signal as to when to sell. A stop loss sell order is a good way to protect yourself!




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