It’s good news for Tesla (NASDAQ:TSLA) shareholders, at least for now. The company is cash positive for the first time and it’s producing more cars.
After a near-40% rally in its shares since the October low, short-sellers are being squeezed and the bear case against this electric-car maker is weakening.
Tesla (TSLA) – 1-Year Chart
The biggest drag on Tesla shares was the uncertainty about its Model 3 production, which is the key to the success of CEO Elon Musk’s more ambitious plans. The main driver of Tesla’s rally since its IPO in 2010 was the company’s promise that it can produce an affordable electric car, the Model 3, for the mass market.
Believing in Musk’s vision, hundreds of thousands of people lined up to buy this car. The problem was that he couldn’t produce enough of them.
But there are signs Tesla is about to clear this major hurdle. Tesla is on track to beat Q3 Model 3 production this quarter, putting it closer to the 60,000-vehicle range, if output continues at current levels, according to a Bloomberg forecast.
More impressively, Tesla is likely to start 2019 making more than 7,000 total cars per week. As Tesla plans to continue ramping up production, the prospect of making half a million electric cars a year begins to seem possible. If this trend continues, barring any major setback, Tesla won’t find any difficulty in paying down its maturing debt.
In the third-quarter earnings report, Tesla reported $881 million in positive free cash flow, a major achievement for the period when Musk stoked controversies ranging from his botched attempt to take Tesla private that triggered a Securities and Exchange Commission (SEC) probe, to accusing a diver in the Thai cave rescue of being a child molester to appearing on a podcast smoking pot.
Still a Risky Bet
For investors interested in Tesla shares, the biggest challenge is believing that this turnaround is sustainable and the erratic behavior of its CEO is over. In our view, Tesla is still a risky bet for serious investors and Musk still remains the biggest threat to its share value.
Just as its stock is recovering from its October plunge, Musk delivered a new barrage of criticism at the SEC, saying in an interview with “60 Minutes” on Sunday that he doesn’t respect the agency and that his communications on Twitter haven’t been censored by the company. Even if we accept Musk’s behavior as one anomaly that investors must live with, we believe it’s too early to place a long-term bet on the company’s shares.
Analysts expect the company to generate $360 million in free cash flow in the fourth quarter and about $110 million in the first three months of 2019. To substantially weaken the bear case against Tesla, the company must meet analysts’ expectations consistently and Musk should resist his urge of sending reckless tweets.
We believe the next two quarters are crucial for Tesla to prove short-sellers wrong and show a sustainable turnaround. Until then, we’re not convinced that Tesla offers a risk-reward equation that serious investors should consider.