The Tesla corporation made it official this week that their growth story is dead. The fact that their stock price bounced upwards only highlights how pessimistic Tesla longs were in 2019. Q3’s tiny profit, even with the revenue crash, finally gave them a little hope. At least until the 10-Q came out which revealed that, in reality, there was no profit.
But the big takeaway, that can be seen even now, is that Tesla reported a drop in revenue while delivering a record number of cars. The extent of their price cutting even took me by surprise. Tesla has a serious demand problem. The bottom line is that Tesla has to cut prices to move metal. This is a terrible place to be for a young company that still hasn’t achieved the scale necessary to become a going-concern. It is now plain to see that the road for Tesla is fast running out and they still haven’t achieved escape velocity.
US sales for Tesla were down 39% year-over-year. This was offset somewhat by new market openings in Europe and Asia. But what happens now that these new markets have exhausted that initial rush of orders? Larger declines in the future. I’ve seen this same story played out when I was helping the Amway company launch new foreign subsidiaries in Europe and Asia. We desperately tried to find new markets to keep the growth happening. But eventually, you run out of new countries and the decline sets in.
Tesla apologists have been pronouncing loudly for a month now that in the face of record deliveries that any talk of a demand drop is absurd. Well, now that we can see the extent of the price cuts required to move those units, it is their dismissal of a demand problem which is absurd. But even they can’t argue with the fact that sales revenue compared to the same quarter last year is down significantly with more cars sold. This is a disaster.
And this drop in revenue isn’t the result of a mix shift to the Model 3. When there is an unfavorable mix shift in the product portfolio, you see the impact in gross margin, not revenue. Revenue should always go up with increased units, never down.
Not having a demand problem would look something like Apple in the early days of the iPhone. Apple knew that they could set a high price and literally every phone that came off the assembly line would sell within days. Apple never discussed cutting prices to help the iPhone sell better. Any talk of cutting iPhone prices or introducing a “low cost iPhone” only came about after demand stalled. Price cuts = demand problem.
Tesla longs will point to the fact that Tesla made a tiny profit this quarter. But serious investors who’ve looked behind the curtain will see that it was meaningless. Expenses were temporarily reduced via warranty accounting changes and material rebates.
I’ve heard some try to minimize the importance of service & support accounting at Tesla. As if Tesla can simply “patch a few cars up” and unload them in the future. It’s not so simple. I was working for Gateway Computers corporate accounting when we shocked the global TV market with our then unheard of 42” Plasma TV for $3,200 and less. No other TV manufacturer could manage to sell a 42” Plasma for under $5,000 and wondered how Gateway could do it. It turns out that Gateway didn’t price in the full cost of servicing those units. We didn’t accrue those costs up front to pad margins and when those units started to come back in large numbers it was the final straw that brought Gateway to it’s financial knees. Warranty costs can be deadly if you’re short on cash.
So if under-accruing warranty costs and taking rebates instead of price cuts will exacerbate future earnings, why go through the trouble? If the pendulum will simply swing the other way in the future why would Tesla take such a risk?
The most likely scenario is that Tesla is shifting expenses and revenue around to generate a quarter of profit. Why? Because they want to raise more capital after a stock rise. The $5 billion of cash that they have in the bank isn’t real. That is the result of withholding bill payments, skimping on customer care, and slashing capital investments. As soon as the quarter is over all those checks get mailed to their creditors and the money is gone. Tesla is still in serious trouble and if you don’t believe that Tesla has a cash problem, listen to their current customers trying to service their cars.
Tesla is actually in worse shape than ever. They have a serious demand problem and their product mix is shifting to lower margin cars. Tax incentives expire in 2020 when increased competition is going to explode. And there are no more new markets with pent up demand. Not to mention the mountain of lawsuits they’re up against with both defective cars and solar panels. All of this while their leaders in manufacturing, engineering, and research & development all jump ship for greener pastures.
Thus far, everything that I predicted in my book The Tesla Bubble is happening right on track. In fact, until now, I’d been reluctant to actually predict which year it’ll become evident that Tesla is a lost cause. That is because it’s hard to say how much money bankers are willing to set on fire. But with Musk facing more and more skepticism on Wall Street and Tesla shipping more and more lemons. I think 2020 could be the end of the debate between bulls and bears. Tesla may still be around but it’ll plain to see that they’re destined to remain a niche player with a money-losing portfolio of low quality products.
It’s easier than ever to see that this corporation is dying before our eyes. It’s more likely that Tesla goes bankrupt in 2020 than it is that they have a million robo-taxis driving around.
The ongoing debate between Tesla bears and bulls has seen one side constantly proven right. The Tesla bears have won victory after victory. Here were the predictions that have come true thus far.
If Tesla Bears have been right thus far, there’s no reason to believe that the rest of the predictions won’t come true.
Tesla can’t keep slashing their selling price to move metal. That is unsustainable. This week is going to be as good as it gets for Tesla longs. Because there isn’t much to look forward to in the future.
But Tesla bulls forget one thing. Tesla doesn’t have to go bankrupt for the bears to win. Even if Tesla could eke out a tiny profit every quarter on par with what they just did, the bears win. That’s because the current stock valuation has profit on par with the Apple Corporation or all of the automakers combined. The stock is over-valued even if Tesla can find a way to survive.
Even with a growth story stock like Tesla, eventually it comes back to the present value of future earnings. And if those earnings are small, there will be a major stock price correction. Unless Tesla can vanquish every automaker and find new industries to dominate, their stock price has nowhere to go but down.
If you’re a Tesla bear, it’s almost a win-win situation.
US sales for Tesla were down 39% year-over-year. This was offset somewhat by new market openings in Europe and Asia. But what happens now that these new markets have exhausted that initial rush of orders? Larger declines in the future. I’ve seen this same story played out when I was helping the Amway company launch new foreign subsidiaries in Europe and Asia. We desperately tried to find new markets to keep the growth happening. But eventually, you run out of new countries and the decline sets in.
Tesla apologists have been pronouncing loudly for a month now that in the face of record deliveries that any talk of a demand drop is absurd. Well, now that we can see the extent of the price cuts required to move those units, it is their dismissal of a demand problem which is absurd. But even they can’t argue with the fact that sales revenue compared to the same quarter last year is down significantly with more cars sold. This is a disaster.
And this drop in revenue isn’t the result of a mix shift to the Model 3. When there is an unfavorable mix shift in the product portfolio, you see the impact in gross margin, not revenue. Revenue should always go up with increased units, never down.
Not having a demand problem would look something like Apple in the early days of the iPhone. Apple knew that they could set a high price and literally every phone that came off the assembly line would sell within days. Apple never discussed cutting prices to help the iPhone sell better. Any talk of cutting iPhone prices or introducing a “low cost iPhone” only came about after demand stalled. Price cuts = demand problem.
Tesla longs will point to the fact that Tesla made a tiny profit this quarter. But serious investors who’ve looked behind the curtain will see that it was meaningless. Expenses were temporarily reduced via warranty accounting changes and material rebates.
I’ve heard some try to minimize the importance of service & support accounting at Tesla. As if Tesla can simply “patch a few cars up” and unload them in the future. It’s not so simple. I was working for Gateway Computers corporate accounting when we shocked the global TV market with our then unheard of 42” Plasma TV for $3,200 and less. No other TV manufacturer could manage to sell a 42” Plasma for under $5,000 and wondered how Gateway could do it. It turns out that Gateway didn’t price in the full cost of servicing those units. We didn’t accrue those costs up front to pad margins and when those units started to come back in large numbers it was the final straw that brought Gateway to it’s financial knees. Warranty costs can be deadly if you’re short on cash.
So if under-accruing warranty costs and taking rebates instead of price cuts will exacerbate future earnings, why go through the trouble? If the pendulum will simply swing the other way in the future why would Tesla take such a risk?
The most likely scenario is that Tesla is shifting expenses and revenue around to generate a quarter of profit. Why? Because they want to raise more capital after a stock rise. The $5 billion of cash that they have in the bank isn’t real. That is the result of withholding bill payments, skimping on customer care, and slashing capital investments. As soon as the quarter is over all those checks get mailed to their creditors and the money is gone. Tesla is still in serious trouble and if you don’t believe that Tesla has a cash problem, listen to their current customers trying to service their cars.
Tesla is actually in worse shape than ever. They have a serious demand problem and their product mix is shifting to lower margin cars. Tax incentives expire in 2020 when increased competition is going to explode. And there are no more new markets with pent up demand. Not to mention the mountain of lawsuits they’re up against with both defective cars and solar panels. All of this while their leaders in manufacturing, engineering, and research & development all jump ship for greener pastures.
Thus far, everything that I predicted in my book The Tesla Bubble is happening right on track. In fact, until now, I’d been reluctant to actually predict which year it’ll become evident that Tesla is a lost cause. That is because it’s hard to say how much money bankers are willing to set on fire. But with Musk facing more and more skepticism on Wall Street and Tesla shipping more and more lemons. I think 2020 could be the end of the debate between bulls and bears. Tesla may still be around but it’ll plain to see that they’re destined to remain a niche player with a money-losing portfolio of low quality products.
It’s easier than ever to see that this corporation is dying before our eyes. It’s more likely that Tesla goes bankrupt in 2020 than it is that they have a million robo-taxis driving around.
The ongoing debate between Tesla bears and bulls has seen one side constantly proven right. The Tesla bears have won victory after victory. Here were the predictions that have come true thus far.
- Demand is a problem evidenced by the need to lower prices.
- Tesla has been cutting back on service and support due to cash concerns
- Tesla quality is not being suffered by the newer casual buyers
- Tesla has been desperately cutting prices
- Full self-driving is years, if not decades, away
- The solar city merger was a bailout done to prevent total collapse of all of Musk’s companies
If Tesla Bears have been right thus far, there’s no reason to believe that the rest of the predictions won’t come true.
- Tesla will never achieve a full year of profit.
- There will be no large-scale sales of the semi-truck, roadster, or solar shingles
- When the reality sets in to institutional investors that Tesla will never be profitable, they’ll abandon the stock.
- Hard-core Tesla believers will refuse to sell their stock and be the ones to ultimately suffer the most losses.
- If Tesla sells, it’ll be for $50/share or less and it’ll be on the condition that Musk isn’t a part of it.
Tesla can’t keep slashing their selling price to move metal. That is unsustainable. This week is going to be as good as it gets for Tesla longs. Because there isn’t much to look forward to in the future.
But Tesla bulls forget one thing. Tesla doesn’t have to go bankrupt for the bears to win. Even if Tesla could eke out a tiny profit every quarter on par with what they just did, the bears win. That’s because the current stock valuation has profit on par with the Apple Corporation or all of the automakers combined. The stock is over-valued even if Tesla can find a way to survive.
Even with a growth story stock like Tesla, eventually it comes back to the present value of future earnings. And if those earnings are small, there will be a major stock price correction. Unless Tesla can vanquish every automaker and find new industries to dominate, their stock price has nowhere to go but down.
If you’re a Tesla bear, it’s almost a win-win situation.
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