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Tesla has red flags everywhere, this portfolio manager says

Concerns are mounting over electric vehicle maker Tesla’s (NASDAQ:TSLA) profitability, and rightly so, says portfolio manager Mario Mainelli, who argues that if the company can’t come through on its entry-level Model 3, then the viability of Elon Musk’s more ambitious plans, for all-electric semis and SUVs, for instance, become ever more doubtful.

Elon Musk is still facing fallout from his brush-off of analysts’ questions during a recent earnings call, where the Tesla CEO dismissed as “boneheaded” and “not cool” requests for comments on his company’s capital expenditures and requirements.

“I continue to hold Tesla (and every company I cover) accountable for implementing a strategic vision that aligns with an ability to execute at scale,” wrote RBC Capital Markets’ Joseph Spak, one of the two analysts Musk cut off in the conference call, in an open letter on Wednesday.

“Some of these questions can seem dry, boring or short-term focused, but hopefully you can appreciate that anyone looking to invest in Tesla’s future must first be comfortable with its present,” Spak said.

Inordinate cash burn seems to be the primary concern, with one recent report judging that Tesla is losing almost US$14,000 on each of its Model 3’s, which go for an average sale price of US$54,000.

Although Musk has insisted that another round of financing won’t be in the cards for Tesla, many are growing more skeptical of the company’s fiscal soundness, with Tesla’s stock down 14 per cent since late February.

“I think there needs to be some separation between how you think about Tesla being a cool company and how it is as a stock,” says Mainelli, portfolio manager at Caldwell Investment, to BNN Bloomberg. “And looking at the fundamentals of Tesla, you see red flags everywhere: they’re burning through cash very, very quickly, extremely high levels of debt [and] they keep overpromising and underdelivering.”

On the issue of Musk’s analyst dissing behaviour, Mainelli says that taking production costs seriously is crucial for Tesla, as it’s the number one concern on investors’ minds.

“What’s scary about it is that so much of their future growth is tied to how well they do now,” he said. “They have all these plans to launch the new 18-wheel truck and SUVs and crossovers, but they still haven’t nailed down this Model 3 as their entry-level car. They need to be able to produce that and sell it well enough to have the cash flow for these other things. I never want to short stocks but I would definitely not be buying Tesla.

Last week, Tesla reported 34,494 vehicle deliveries over the first quarter of 2018, an increase of 40 per cent from a year ago. The company said that it has ramped up to 2,200 Model 3’s as of the last week of Q1, which missed their guidance target of 2,500 vehicles.

On Musk’s leadership, Mainelli says that while it’s obvious that Musk is strong on the creative end, he may need a strong operator on hand to push production levels.

“You have GM and Ford and all the [others] coming out with electric vehicle models within the next few years, so his first-mover advantage is slowly fading. It might be a tough ride for him,” says Mainelli.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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