Is Tesla Inc. a Buy?

If you're like me, you've probably given up on trying to figure out Tesla Inc. (NASDAQ:TSLA). The electric car company (and solar panel installer, thanks to its purchase of SolarCity) doesn't seem to play by any of the normal investing rules. Neither does its founder and CEO Elon Musk. Trying to measure the company by the same metrics as, say, conventional automaker General Motors is impossible.

Coverage of some of Musk's more newsworthy statements and of Tesla vehicles' occasional mishaps tend to crowd out other coverage of the company. But if you're trying to figure out whether to buy a stake, you should look past all that. Let's focus on what really matters to see if Tesla is a buy.

A red Tesla Model 3 with a city skyline in the background

Tesla needs to ramp up production of its Model 3 to achieve profitability. Image source: Getty Images.

What doesn't matter

Negative news coverage seems to have more of an immediate impact on Tesla's stock price than just about anything else, even its earnings reports. But none of it seems to stick.

Take, for example, the reports of a fatal Model X crash in California on March 23. The crash occurred on a Friday, and the following Monday, Tesla's stock lost nearly 15% of its value. Less than two weeks later, on April 5, it had gained it all back. Contrast that to when the company reported its biggest-to-date quarterly loss on Feb. 7 and the stock "only" lost about 8% of its value. But it still gained it all back again by Feb. 22, about two weeks later.

Even when these events happen in tandem -- for example, Musk's unorthodox remarks on his Q1 earnings call on May 2, in which the company reported more than $1 billion in negative free cash flow -- a predictable pattern emerges: The stock suffers an immediate hit (in this case, just over 5%), and within two weeks it gains it all back.

What this should tell investors is that Tesla's stock moves are pretty much divorced from the company's fundamentals. Look no further than the company's Q2 earnings release, which reported a(nother) record quarterly loss, but caused the stock to jump by about 10%. You can bet that if GM reported its largest-ever quarterly loss, or massive negative free cash flow, the stock would sink, and stay there until the company could prove to investors it was turning things around. Not so Tesla -- and sure enough, about two weeks later on August 20, the stock reverted back to about $300/share (helped along by a New York Times interview with Musk).

Takeaway: Even if you decide Tesla is a losing proposition, you short the stock at your peril.

The writing on the wall

Tesla is, essentially, a rock-star company. It generates tremendous enthusiasm among its followers and tremendous disdain among its detractors. The same applies to Musk. But the problem with this rock-star status is that so much of Tesla's coverage is devoted to big, splashy headlines that don't really matter to the company's bottom line (Musk's Thai "kid-size" submarine, for example, or his disparaging Twitter comments about one of the Thai rescuers and subsequent apology). And so, some important information slips through the cracks and gets lost.

For example, in June, Tesla announced it would lay off 9% of its workforce, or about 4,100 people, showing that the company is concerned about its finances. This comes amid a stream of senior executives heading for the exits, including senior vice president of engineering Doug Field and Autopilot division head Jim Keller, which generally isn't a good sign for any company. Finally, even Musk himself, in a letter to employees announcing the layoffs, admitted:

Given that Tesla has never made an annual profit in the almost 15 years since we have existed, profit is obviously not what motivates us. What drives us is our mission to accelerate the world's transition to sustainable, clean energy, but we will never achieve that mission unless we eventually demonstrate that we can be sustainably profitable. That is a valid and fair criticism of Tesla's history to date.

This is an uncharacteristic statement from Musk, who has often derided critics of his company. It seems to show that Musk knows Tesla needs to start turning a profit -- and soon -- or suffer the consequences. But can it?

The wolves at the door

Musk and Tesla have made, and broken, many promises over the years, from production targets to rollout deadlines. Current promises on the table include:

That Tesla will produce 5,000 Model 3s per week. The company managed that feat in the final week of Q2, according to Musk, by pulling out all the stops. But can it do so week in and week out?
That Model 3 gross margin will (eventually) reach 25% or more. But the company is only predicting a 15% gross margin in Q3.
That Tesla will not need to raise more capital in 2018. Many analysts are skeptical of this claim, particularly in light of Tesla's billion-dollar-plus negative free cash flow in Q1 2018.
That after the current layoffs, Tesla will "never have to do this [lay off workers] again."

You probably won't be surprised to hear me say that it's unclear whether Tesla can meet these promises, either in the short term or the long term. An investment in Tesla is largely an investment in Musk's long-term vision, and it may take quite a while to pay off.

But as the deadlines get missed, the production targets get delayed, and the cash continues to flow out the door, competitors are catching up. For example, GM now has the Bolt electric vehicle on the market, and is seeing global demand outstrip supply. Other rival manufacturers are unleashing high-end electric vehicles of their own. These companies have plenty of cash and large research and development budgets, and are well-respected brands in their own right.

Basically, as Musk seems to realize, Tesla needs to put up or shut up on its promises.

At these prices

Given its lofty share price -- as of this writing, about $320/share -- combined with real concerns about profitability, margins, production, competition, "brain drain," and finances, I can't call Tesla a buy, particularly as much of this seems to be coming to a head.

What gives me pause is how little any of this has mattered to Tesla's stock performance in the past. It's possible more bad news will emerge about Tesla and its stock will rise even further. Or that it will report some favorable news and the stock will go down. Either way, if history is any guide, shares may revert to the mean in two weeks.

One thing's for sure: An investment in Tesla at these prices is a risk. If you want to take the gamble, make sure it's with money you can afford to lose.

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