Electric car maker Tesla (Tesla Stock Quote, Chart NASDAQ:TSLA) continues to get battered around this month, with its share price now down a whopping 21 per cent for May. There are lots of factors at play, from production issues, quarterly misses, rising competition in the electric vehicle market, not to mention a mercurial CEO in Elon Musk. It’s hard for investors to see what lies ahead for the company.
But reaching a verdict on Tesla is simple, says portfolio manager David Fingold of Dynamic Funds: the car company has no free cash flow and therefore it’s in no-go territory.
“We look at the cash that a business can generate over a material amount of time like ten years and see whether or not the value of the company is less on a discounted value than the cash that it’s going to generate. Then we can make an actual investment analysis,” said Fingold, in conversation with BNN Bloomberg Monday. “In this case, we’ve got a company where we can’t complete our analysis.”
Last week in a move to bring in car buyers, Tesla reduced the prices on its two most expensive models, chopping $3,000 off the sticker of its Model S sedan and $2,000 from its Model X SUV. Tesla is battling investor concerns about its ability to turn a profit, with the company badly missing analysts’ forecasts for its fiscal first quarter, delivered in April. The car maker generated $4.54 billion in revenue compared to the expected $5.19 billion, while it took a loss of $2.90 per share compared to the expected loss of $0.69. (All figures in US dollars.)
Tesla had posted profits for the third and fourth quarters of last year but shrinking margins and a perceived decline in buyer interest are hampering the company, which announced in late April that it had sold 31 per cent fewer cars in the first quarter than in Q4 of 2018.
At the same time, Tesla revealed that it is planning to raise another $2.3 billion through the sale of shares and bonds —further reason to be skeptical about the company’s prospects, says Fingold.
“This is a company that has needed to raise capital over and over again. If they’re not generating free cash flow, there’s no way for me to value it, so I simply cannot have an opinion. I would say that if it needs to keep on raising capital in order to keep on operating, it makes it impossible for me to value,” he says.
So far in 2019, Tesla’s share price is down 43 per cent, while it remains 51 per cent off its all-time high set in September 2017.