Editor's Note: Our analyst Jay Van Sciver is hosting a critical update on our Tesla (TSLA) short thesis at 2PM ET today. Email sales@hedgeye.com for more information.
Shares of Tesla have not responded well to positive catalysts in recent months. TSLA’s share price barely moved on the showy introduction of the Tesla Semi and Roadster. Heck, Tesla only inched higher on the SpaceX launch of a Tesla Roadster into space. Negative catalysts have had more sway, such as 4Q17 results. Tesla now faces a steady stream of severe and largely irreversible negative catalysts, including tax credit expiration, broad competitive entry, and platform quality issues.
While we came reasonably close to the top in our first two Tesla black books, reflecting that “story stocks hate dates with reality” and that Tesla was “an objectively horrible manufacturer”, we now expect downside acceleration. Tesla is not an affordable luxury with endless pricing power. It is a capital goods manufacturer whose core competency is turning $1 into $0.80 while looking cool. Unfortunately, as a business, Tesla is a structurally disadvantaged zero.
Highlights
- Demand At Risk: Bull story is 'people want these cars', but delays, competition, and reliability likely to jeopardize this assumption
- 4Q 2017 Not-So-Great Results Unsustainable: Tax-driven buying, emissions credit sales lead to cash flow and revenue air-pocket in 1Q18
- More Revenue, More Losses: Incremental margins with a negative sign don’t portend scale benefits, sustainable positive operating margins
- Structural Cost Disadvantages: Tesla lacks the scale, balance sheet, and facilities to compete
- Model 3 Line Dysfunction: These challenges are time consuming to fix, and show the characterization of the Model 3 as misleading
- Tesla Needs A Fact-Checker: Management is great talking up the future but lacks transparency on misses
- Battery Degradation, Quality Issues: Aging platforms are likely to become an increasing issue for would-be buyers
- Narrative & Brand Failing: The Tesla brand is increasingly vulnerable, while product quality issues are a critical headwind
