It's hard not to know what the world's first mass manufacturer of electric cars, Tesla (NASDAQ :), achieved in 2018. With all the challenges associated with the remarkable behavior of CEO Elon Musk and his loose talk on Twitter, the company still made some real progress.
Sales more than doubled to $ 7.23 billion in the last three months of 2018, fueled by the steady production of Model 3. That number beat analysts' estimates for $ 7.12 billion. The deliveries of his compact car amounted to 63,150 in the fourth quarter compared with 1,550 a year earlier. And for the first time Tesla delivered two straight.
While Tesla emerges from what Musk is the most challenging & # 39; In the history of the car manufacturer, someone who saw him disappear as chairman after his unsuccessful attempt to take the company privately, many investors wonder whether this is the right time to gamble on Tesla shares in the long term. The problem we encounter in 2019 is that Tesla's problems are likely to increase as the company struggles with the production of the $ 35,000 version of Model 3 Sedan, which, according to Musk, is crucial to remain profitable on a sustainable basis and its vision to make on producing electric cars for the mass markets a reality.
In 2018, the biggest obstacle to Tesla shares was the uncertainty about the Model 3 production. Although Tesla seems to overcome its production challenges, other, bigger problems also get their ugly head.
Firstly, Tesla has to carry out a serious cost-cutting exercise to make a car that sells quickly and is also profitable at a time when US tax benefits for energy-efficient vehicles are curtailed. Tesla has already lowered the prices to partly compensate for the halving of a tax credit, which proved to be a big incentive for buyers. That credit will decrease again in July and then stop completely at the end of the year.
Musk responds to this challenge by reducing the number of Tesla employees. In January, the company announced staff reductions of 7%, a movement that tumbled its shares by around 8%, because investors considered it a sign of weakness.
According to UBS Securities estimates, Tesla would lose about $ 4,000 per Model 3 if it were sold for $ 35,000. With a profit of $ 42,000, Tesla was able to realize approximately $ 1,000 in operating profit, with the $ 49,000 version that generated approximately $ 3,000, according to UBS.
For us, getting rid of that gap and making a profit seems difficult, with a long way ahead and a lot of risks lurking around. The most threatening of those risks is a potential slowdown in demand in 2019 amid the significant headwinds for the global economy, especially in China, where Tesla is betting a lot.
The other big hurdle in the way of the company is the cash flow problem. Although the car manufacturer has shown improvement on this front in the last two quarters and reported a $ 3.7 billion cash stack by the end of the fourth quarter, we still think that the amount of money could be quickly wiped out, given the major spending plans from Tesla and its unstable business performance.
The company's money shrank last year to dangerously low levels amid its efforts to boost production. According to Musk, Tesla has enough money to link a $ 920 million debt payment to the company's stock performance. Tesla will have to pay this debt in March if the share is below the exercise price of $ 359.87
Even if the company is able to successfully drive through its tight cash position, its $ 10 billion long-term debt is a constant source of pain that will limit its growth and keep serious investors at bay.
Tesla weekly, 3-year chart
Short overview
Tesla shares closed yesterday at $ 298.77, a second profit day after three days of loss. Tesla shares continue to exhibit an extremely volatile trading pattern that is not suitable for long-term and serious investors.
There is no doubt that the company showed improvements in key performance statistics last year, but we are seeing that turnaround as very shaky territory. A small drop in production and cash flows could cause Tesla files to dive further into negative territory. Waiting on the sidelines is the best strategy when it comes to Tesla.
