Not Buying Tesla
Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tomorrow is a big day for Tesla (NASDAQ: TSLA), they are announcing their Q4 earnings, and if all goes as expected, Tesla will report their sixth consecutive quarter with negative earnings. You read that right - six straight quarters with negative earnings. The consensus amongst the analysts that cover Tesla is loss of $0.61 per share, or $.06 less than their Q3 2011 loss of $0.55 per share. Despite dismal earnings since going public, Tesla has garnered public support and a fairly dramatic increase in share price.
Since January 2012, Tesla shares have sharply increased from around $23 a share to its current price of close to $32 a share for roughly a 40% increase in share price in a matter of a month. However, I don’t buy the recent run up as a positive signal for Tesla. Just because a company is experiencing positive momentum of their share price doesn’t mean that everything is okay with the company. Tesla is an interesting company where their stock price is higher on every earnings release than the previous earnings release, despite a continual negative earnings figure. There are several reasons why I don’t buy Tesla, but here are a few.
Tesla is an anomaly. Take the following scenario. One day, your friend who owns a bricks and mortar movie rental business comes up to you asking you to invest in their company. Being the wary investor that you are, you tentatively agree to hear their plan out, and to take a look at their business, what you find is concerning. Over the past year your friend’s business has a profit margin of -111.5%. Their business has seen an increase in long term debt of 80% and they aren’t paying their bills as quickly as they used to, causing their accounts payable to grow by almost 73%. Now you really care for your friend, but you have been burned by poor investment decisions in the past. You ask your friend why you should invest in their company with such poor performance results. Here is your friend’s response,
“My business operates in an industry that has seen increasing external pressures culminated by bankruptcies and consolidation of some of the industry’s leaders, leaving an opportunity for the little guy to grab market share that has been ignored. My company is still open and producing new innovating processes that will position us as an industry powerhouse one day.”
Your friend’s argument is convincing, but the red flags that were raised by your fundamental analysis on his company still gives you cause for concern, and you stick with your decision to not invest in their company.
Now flip the situations. You want to invest in Tesla, a company who has a profit margin of -111.5%, a company whose debt has increased by 80% over the past year, and seen an increase in accounts payable of 73%, and a wound that hemorrhages cash. However, you think to yourself, Tesla is a business that operates in a space that has been ignored by the major industry players. They provide cutting edge, innovative products that can revolutionize the entire auto industry…one day.
The point of that scenario was not to make light of the struggles of the video rental business, it is to show that a lot of people ‘believe’ in Tesla so much that they are willing to overlook the obvious warning signs presented in Tesla’s financial statements on the hope that one day Tesla is going to make it big. If you don’t believe me, just read some of the comments from this fellow Fool blogger on his article about Tesla.
Truth be told, I hope Tesla does make it as a company. I like the concept of an all-electric vehicle, and with the latest unveiling of the Model X, Tesla has started building a fleet of cars that can appeal to a broader customer base. That being said, there are obvious warning signs that make me wary of Tesla. When Tesla announces their earnings tomorrow after market close, there must be proof that their business viable and the model is working. Investing on a hope and a prayer just doesn’t cut it.
Motley Fool newsletter services recommend Tesla Motors . The Motley Fool has no positions in the stocks mentioned above. dillarda has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.