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Don’t get me wrong. I think the cars made by Tesla Motors (NASDAQ: TSLA) are fantastic. However, there are numerous problems surrounding the products and the company that warn me off of ever buying the stock.
One such problem is that the company makes it clear that it doesn’t expect net profits for another five years. Somehow, by then, it will be selling a half-million cars per year. Until then, CEO Elon Musk is telling investors to just be patient while he spends billions to create his auto empire.
The latest news is that Tesla plans to raise $500 million in a new stock offering. What investor thinks it’s a good idea to buy the stock when the company was free cash negative by over $1 billion in 2014, even in 2013, and negative $512 million in 2012?
So why exactly am I so negative about Tesla and the latest equity raise? Here are just a few reasons:
It’s a Tiny Market
You know what matters to most car owners? That their darn car works. Few people really care whether it runs on gas, electric, batteries or unicorn dust. They care about price and reliability.
Tesla will always lose the price war. The cars cost far too much money, and your average family of four in Middle America cannot afford it, nor do they want it. The batteries cost far too much right now, although we might expect prices to decline over the next few years.
There will never be a mass market for Tesla cars. Well, maybe one day there might be, but by then, Tesla will be out of business. The cars are for auto enthusiasts, not for soccer moms or Middle America families. No market equals no profits.
Supply and Demand
Tesla had to resort to spending billions on its own battery manufacturing plant. It couldn’t reach agreements with third parties to manufacture the units, so now investors get saddled with huge costs for a battery factory. Although this might eventually pay off, it assumes Tesla actually can afford to pump out enough batteries and sell enough cars to justify the expense.
It’s a Trader’s Stock
Tesla loses money every year. It lost $294 million in fiscal year 2014, $75 million in FY 13, and $396 million in FY 12. It has lost $339 million so far this year. And yet, the stock trades at $254 per share, with a market cap of $31 billion. That’s right, a company with nothing but losses is valued at $31 billion!
This means that the stock is nothing more than a trader’s dream and a momentum play. That’s not an investment, folks. It’s no different than walking into a casino and putting all your chips down on red at the roulette wheel. In order to justify its market cap, it would not only have to be making money, but making at least a half-billion dollars.
Not a chance.
There is no reason to be invested in this company. If you want to gamble as a trader, be my guest. You might do extremely well. However, don’t fool yourself thinking this is an investment. As I said, the market will never be big enough, and there’s more than enough competition at the right price points that Tesla could be the next DeLorean.
Tesla, Apple and Google are creating this
When people think of Tesla, what immediately comes to mind is the world’s first electric car. It’s an astounding achievement. But what few people realize is that Tesla’s next technological wonder could easily put it to shame. Morgan Stanley says this breakthrough could save the American economy $1.3 trillion each year. And Tesla’s not the only one racing to get it out the door. Apple and Google are working on their own versions too. Get the whole story right here.