There are plenty of reasons to be bullish about Tesla (Tesla Stock Quote, Chart, News NASDAQ:TSLA), chief among them being its leadership in the still-emerging electric car space.
But investors should think twice before buying the stock even at its currently reduced share price, says John Zechner, lead equity manager and chairman of J. Zechner Associates.
For his money, Zechner thinks that Tesla’s days as the undisputed champion of the electric car are numbered.
All eyes will be on Tesla this week as the car maker delivers its third quarter earnings report, which is likely to disappoint on vehicle demand, according to data that the company released earlier this month. Tesla said that it had delivered about 97,000 cars in its third quarter, including 79,600 Model 3 sedans, lower than the average estimate by analysts covering the company who pegged deliveries at 99,000 vehicles and a potential sign that demand for Tesla’s cars is weakening.
Earlier this year, CEO Elon Musk had said that Tesla would deliver between 360,000 and 400,000 cars in 2019, which would make the number needed over the fourth quarter upwards of 105,000 or more.
After the deliveries announcement, JMP Securities was noted in dropping its rating on Tesla from “market outperform” to “market perform,” with analyst Joseph Osha saying in a report that with no known operational issues to blame for the lowered growth in deliveries, the third quarter deliveries announcement “was the first time since covering the stock that we found ourselves wondering whether demand growth for TSLA’s cars might be levelling off.”
But aside from slowing demand, investors should be thinking about not only Tesla’s poor cash flow but also the other car companies in its rearview mirror, Zechner says.
Zechner is short Tesla stock…
“We’ve been short this stock for well over a year but I did cover just during that last little downturn,” says Zechner, in conversation with BNN Bloomberg on Friday. “But my concerns are the same: massive negative cash generation and at the same time you’ve got competition. All the majors are coming in to the electric vehicles. You look at GM, you look at all the foreign manufacturers — they’ve all got prototypes coming in, so [Tesla] is not going to own this market anymore.”
“Elon Musk has the first-mover advantage but I don’t really think that he has taken advantage of it. They’ve had production issues along the way,” he says.
Tesla’s share price dropped after its second quarter earnings in late July where the company posted a loss of $1.12 per share on an adjusted basis compared to the $0.40 per share expected by analysts. The company’s revenue came in slightly under consensus, as well, at $6.35 billion compared to the expected $6.41 billion. (All figures in US dollars.)
Zechner says that Tesla looks like Netflix, which while still the dominant force in content streaming is about to see a rash of competitors come online, including Disney, Apple and NBC Universal.
“To me, it’s like the Netflix of the auto industry — first mover advantage, big negative free cash flow, and that’s costing the valuation and then you’ve got competition coming in,” Zechner says.
“I don’t know exactly who’s going to win the streaming wars but I know that one guy is way valued up there and Netflix is going to lose all of their advantages in terms of pricing and even in gains. People will have multiple servers but you’re not going to be unlimited in this,” he says.