Last night (08/01/18) Tesla reported its financials for its quarter and six months ended June 30, 2018. Short sellers had been hoping that Tesla’s negative cash flow and cash position would come in below analyst’s expectations. That did not happen. Tesla’s burn rate was lower and its cash position was higher than analysts had been projecting for its quarter ended June 30, 2018. Short sellers paid a heavy price. Tesla shares closed up on the day by $48.70 per share and at $349.54, representing an increase of 16.2%.
Since there had been stories circulated about Tesla asking its suppliers for refunds I conducted my preliminary analysis of Tesla’s Financial Statements. I checked their Balance Sheet and Cash Flow Statement to see if there were any accounting tricks that have been utilized to reduce the burn rate and increase the cash position. I did not find any. I did notice that Tesla’s gross profit margin for the June 30 quarter was 15.5% versus 23.9% for its June 2017 quarter.
Its clear to me that for the foreseeable future that Tesla’s burn rate and cash position is no longer a catalyst for the share price to go lower. My biggest issue with Tesla had been its negative free cash flow due to its massive and ongoing capital expenditures budget. This issue for me has been at least temporarily alleviated due Tesla providing guidance that its capex for 2018 capex is expected to be slightly below $2.5 billion, which is significantly below the total 2017 level of $3.4 billion.
My question of scalability that I brought up in a previous article entitled Tesla’s Unscalable Quality Control Revelation Cause of Extreme Share Price Decline about Tesla remains. However, it will require a significant increase in Tesla’s volume for this to become a bigger risk.
A recent issue that was recently surfaced by a ZeroHedge author in their article SolarCity Booked “Millions in Phantom Revenue”, Created “Bogus Accounts” Ex-Employee Claims was disconcerting. And even though, Solar City was the worst possible acquisition to make based on my previous experience with the solar industry stocks and most specifically AstroPower and Sun Power it does not contribute enough revenue to Tesla for it to become a big risk the new short seller catalyst. See “SunPower’s Future Not So Bright”.
I believe that what will bring Tesla down more than anything else is its revolutionary business model. It’s CEO Elon Musk has gone to great lengths to differentiate Tesla’s manufacturing, sales and customer service models as compared to Ford and General Motors and the rest of the world’s automobile manufacturers. From the preliminary research that I have conducted on Tesla’s model and the disadvantages that it has my prediction is that it’s going to be very difficult for Tesla to escape anything more than a mild recession. Tesla which manufactured its first automobile in June of 2008, has not yet had to undergo a recession.
I am presently in the process of producing an extensive report about the flaws that I see in Tesla’s business model. This report will be available to the subscribers of Perfect Shorts. To sign up go to https://bullsnbears.com/perfect-short/.
In 2002, I developed an algorithm which was successful to predict the bankruptcies of several high profile and seemingly healthy public companies who were highly recommended by Wall Street analysts. This includes The Fleming Companies, which had been NYSE listed and paying a dividend for many years in 2002 and Lehman Brothers in 2007. See “Have Wall Street’s Brokers been Pigging Out”, September 2007.
My conducting post mortems on these companies enabled me to identify the common thread among them. It was that they had untested business models that had not been through a recession or a secular bear market. Since my finding them and predicting their demises was like shooting fish in a barrel I named them “Perfect Shorts”. The definition of perfect short is a company that has a share price that has the potential to go to zero. Lehman and the four other broker dealers that I had named in my September 2007 were good examples of having untested business models. It’s because all of them went into a new and unproven business after the dotcom crash which generated cashless profits; subprime loans. View Perfect Shorts video below. For more information on a Perfect Short and to be alerted about the Perfect Shorts when they are identified go to https://bullsnbears.com/perfect-short/.