Tesla (NASDAQ:TSLA) stock price plunged by -7.4% in premarket trading on Thursday after the company announced that deliveries had fallen short, problems had affected production, and a strong dollar had hurt earnings. Those earnings turned out to be a real stinker, with Tesla posting a loss of -$0.13 a share, after steering analysts to expect a profit.
With the company hemorrhaging cash, CEO Elon Musk bizarrely predicted Tesla’s market value in ten years would equal Apple’s (NASDAQ:AAPL) $700 billion market cap.
You have to give credit to Musk for extreme hutzpah. Despite SEC investor protection requirements that companies listed on stock exchanges follow what are called Generally Accepted Accounting Policies (GAAP) in reporting financial results, Tesla reports on a “non-GAAP basis” and gets away with it.
This bit of accounting magic helped Tesla turn a GAAP loss of -$74.7 million, or -$.60 per share in the third quarter into a non-GAAP profit of +$3.2 million, or +$.02 a share. But not even a magician could have prepared the stock analysts for a 2014 fourth quarter non-GAAP loss of -$42.3 million, or -$0.13 a share. The GAAP–compliant loss was stunning: -$107.6 million, or -$0.86 per share.
Musk said the on the company’s earnings conference call that he believed TSLA shares would rise over the next ten years from around $27 billion today to about the same $700 billion as Apple stock. His forecast “only presumes” consistent annual sales growth of 50% with 10% profit margins and stock market multiple of 20 times profits. “Our market cap would be basically the same as Apple’s is today,” Musk concluded. “Obviously, getting there will require some significant CapEx [cash injections]. But hopefully we can do this without any significant dilution to the company.” He did caution that on numbers that could fail to materialize, “but I bet that they do occur, personally.”
Of course there have only been a few small companies that could ever boast that type of record. Apple is not one of them, because the company got into such deep financial trouble twice and almost filed for bankruptcy. Essentially, Musk is claiming that he is much smarter and much more creative than the phenomenal Steve Jobs.
After the pep talk by Musk, the stock rallied and by the end of the day, the Tesla stock closed at $202.88, down -$9.92 or -4.66%. Musk did not mention that the stock was as high as $291.42 in early September, before oil prices were cut in half and green competition began rising from such pesky upstarts as Mercedes, Audi and BMW. With its i8, BMW appears to have the “emotive appeal” of the original Tesla Roadster.
Top-drawer institutional broker JP Morgan was so impressed with the earnings call they immediately down-graded the stock to an “under-weight” position. That is polite Wall-Street-speak for the game is over and dump that loser!
JP Morgan said the last six months prove the company does not have the ability to scale sales and production profitably. They have no faith that Tesla can meet its own prediction of delivering 55,000 vehicles in 2015 versus 32,000 in 2014. They are all but rolling on the ground over Tesla’s claim to ship 500,000 in 2020 and “millions” in 2025.
Some of the risks for the Tesla horror show highlighted by JP Morgan include that operating expenses are higher; 4Q EPS was a loss rather than profit; 4Q free cash flow was a bigger outflow; Tesla guided 1Q production -33% lower; 1Q operating expense guided much higher; 1Q gross margin guided is softer than JPM expected; full year 2015 delivery guided down; 2015 operating expense guided up; and lower 2015 earnings.
But the real back-breaker for shareholders is that 80% of Tesla quarterly earnings reports since 2011 showed negative cash flow. JP Morgan seems to wonder whether Tesla will eventually run out of cash. Musk can still raise money, but diluting shareholders at lower and lower prices will cause investor anger. If the stock continues to “dumpster dive,” as they say on Wall Street, Tesla could eventually be cut off from new cash.