- The company is not able to generate positive FCF in a yearly perspective.
- Elon Musk is a good inventor and seller, but a bad CEO.
- Competitors will erode Tesla’s business.
- The Solar City merge is going to create a negative FCF and debt monster.
Taking a look to the income statement, we can see that the company is increasing its income at a 66% rate, but that their total cost of revenues is increasing by a 67% yoy.
We can also see that their leverage is ballasting their net income as it has been increased from $80M to $133.7M and with a rate hike expected to happen sooner rather than later that’s not good for Tesla.
If we look at the balance sheet, we can see that the company has been able to rise up to $3B in cash, but having to spend $2.6B to buy Solar City and burning more than $500M per year, the company will have to borrow money or dilute shares at the end of the year or in 2017.
Taking a look at some ratios, we can see that Tesla has a -27.63% ROIC and a 8.16% WACC, so Tesla’s not creating any value for its shareholders at the moment.
We can also see that, despite having improved its margins and even obtained a positive net margin and FCF during the last 3 months, its margins and FCF are still negative if we take into account the total year.
There’s also the fact that the positive FCF is just a matter of financial engineering, as if we take a deep look to the balance sheet, we can see how they have boosted the FCF by increasing its Accounts payable and accrued liabilities by around a 100%.
Now, if we take a fast look to SolarCity, we can see that the company is money burning machine as its FCF is negative, as it is its net margin ($2.8B and -17.65% respectively). But there’s something else, and that’s the fact that SolarCity has a debt of $3.3B, what combined with Tesla’s debt would be a total debt close to $6B.
There has been other issues related with the merge such as the fact that there are just 2 independent board members in Solar’s City board, as the other are people directly related with Elon Musk. So some people sees the merge as a way to put money on Elon’s Musk people’s pockets.
There’s also the fact that Solar City is losing market share, as according to GTM Research during the first quarter 2016 installations grew 38% year over year for US national installers, but a 69% for regional installers.
We have recently seen how Tesla has been able to turn positive in a quarterly basis, but we have also seen, as Bloomberg said, that some competitors are starting to enter the market, such as Mercedes-Benz, that plans to offer 3 cars, including a SUV to the electric market.
As we can see in the case of Mercedes-Benz, those competitors and potential competitors are giants with positive FCFs and car making expertise. The fact that they haven’t still entered the electrical car market makes me think that there’s still not too much market for those giants, but once people decide to take the deal and turn into electric cars, they will wake up and it will be really difficult for Tesla to retain market share.
We also have the fact that BYD, a Chinese electrical car maker has sold more cars than Tesla.
As the title says, in my opinion Tesla is living on borrowed time as it has been demonstrated that the company is not able to generate a positive FCF without using financial engineering like in the last quarter (that in my opinion is just a trick to obtain an ok for the merge with SolarCity the 17th of November).
For me, the company is a short as it will just be able to continue its business if investors decide to keep their money flow into the company.