Tesla has 50% downside
The bull case
The bulls have a case because of the cult like following Tesla has. All the bulls point to how everyone loves the product. They have a point there I have never heard anyone complain about the car. If a bull can form thesis that is based on valuation, I will listen.
Bulls vs Bears
Tesla is your typical bulls vs bears story. The bulls believe in the product, the vision of Elon Musk, and sacrifice now for the future. The bears are realists and worried about the business model and Musk’s unpredictability. Attacking the demand side is how to poke holes in almost every bull thesis. My main catalyst for a decline in demand of Tesla cars is the tax credit being cut in half and new electric vehicle competition coming to market.
Competition
Tesla’s tax credit will be cut in half on January 1st 2019. Going from $7500 to $3750. It will be cut in half again on July 1st 2019 from $3750 to $1875. On January 1st 2020 the tax credit will run out. I believe the first tax cut is when demand will start to slow down. In terms of competition there are many electric cars coming to market such as the Jaguar I-Pace, Audi e-Tron, Porsche Taycan, Porsche Mission E Cross Turismo, Mercedes-Benz EQC, Hyundai Kona Electric and Kia Niro EV. Jaguar, Audi, and Mercedes electric cars will all most likely hit the market in 2019 qualifying for the full $7500 tax credit. When one of those cars comes out is when I expect demand for Tesla cars to fall. I do not believe that Tesla is superior to theses cars.
Problems with production and repairs
According to Munro & Associates, a specialty engineering consultancy, Tesla’s quality assurance is “something from the seventies.” Production issues have been well documented in the media. The most surprising one is that 86% of model 3s needed rework. According to Ron Harbour “A competitive plant will pass 80% or more vehicles that do not need repair where the average is 65–80%.
Why are employees leaving?
Ten executives have left their positions since September. Aaron Chew, senior director of global sales, marketing, and delivery, Dan Kim, head of global security Jeff Jones, senior director of production and quality, Antoin Abou-Haydar, head of human resources Gabrielle Toledano, chief accountant Dave Morton, head of communications Sarah O’Brien, vice president of global supply management, Liam O’Connor, vice president of worldwide finance and operations Justin McAnear, and legal vice president Phil Rothenberg. The simplest reason behind the executives departures is because Elon Musk is tough to work for. He sets goals that go against The executive that makes the least sense is Dave Morton, Chief Accounting Officer who left before reporting their best quarter yet. He had only been at Tesla for a few months. If the numbers were as good as reported why did he leave. Either they were not and he did not want to be associated with them or Musk pressured him to keep making the numbers better. It is almost inconceivable, the man in charge of accounting leaves before they report a record breaking quarter.
Lawsuits at the company
The financial media leads people to believe that Tesla is done with lawsuits after Musk settled with the SEC after the funding secured tweet. The financial media is either misinformed or only trying to pump out good news. Here are 5 lawsuits that can be found on a quick google search. Defamation against the Thai cave rescuer, securities law violations on the “funding secured” tweet that seek to compensate short sellers, wrongful termination, hacking and trade secret theft and violation of labor laws. Those are the lawsuits that can be found at a moments notice. There are most likely more whistle blowers building their case quietly.
Conclusion
Tesla has too much risk in the next 1–2 years. With the tax credit being lifted, competition coming to market, debt payment coming due in Q1 2019, high level executives leaving, potential of higher than expected contingent liabilities and product quality issues. I believe Tesla has 50% downside from here. This would put my price target at $165–170.
