February 20, 2019

The stock market’s recent strength has lifted a lot of stocks, especially those in the wildly popular NASDAQ 100 index. However, we expect that at least one flagship stock in the Nasdaq 100 will falter in the upcoming months, namely Tesla (TSLA).

I have to clarify that this is also the view of Louis Navellier, the CIO of Navellier & Associates.

For the record, we are fans of electric vehicles like Audi E-tron and Porsche Taycan. The VW Group (Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat, and VW) will be making the most electric vehicles in 2020. They are widely expected to be less expensive and of higher quality than Tesla’s comparable models. In fact, Tesla recently curtailed production of its expensive S & X models due to increasing competition from quality competitors, including Audi, Jaguar, Mercedes, Porsche, and Volvo.

To be fair, it is not uncommon for a younger company to lose money. Years ago, the more sales Amazon had, the more money it lost. Until the third quarter of 2018, when Tesla reported strong profits, it too was caught in a “rising sales, rising losses” cycle, but I think it’s wrong to think of Tesla as the next Amazon.

Amazon’s CEO Jeff Bezos spent money like a drunken sailor in the first five years of being public in order to get a competitive advantage in Amazon’s distribution network. Bezos understood that no brick-and-mortar business could ultimately equal his lower costs, despite the big initial investment. Walmart, which is the largest retailer in the world to this day, cannot match Amazon’s distribution capability when it comes to home deliveries. I suspect Walmart will get a lot better at home deliveries as time goes by, but Amazon already has a large and happy customer base that will be difficult to convert. But Tesla does not have any competitive advantages in the automotive industry the way Amazon has in the world of retail.

(Navellier & Associates does not own Tesla in managed accounts nor in our sub-advised mutual fund. Navellier & Associates does own Amazon and Walmart in managed accounts and our sub-advised mutual fund.  Ivan Martchev does not own Tesla, Amazon, or Walmart, personally.)

A number of bottom-up investors see trouble on the horizon. Famed short-seller Jim Chanos is betting against the stock and has been very vocal about his position (see August 27, 2018 Marketwatch article, “‘The corporate-governance disaster that is Tesla continues,’ says one of the fiercest critics of Musk and company”). Elon Musk is fighting back and playing dirty in the meantime. He engineered quite the short squeeze in the summer of 2018 with tweets that he had secured financing for the company to go private, a statement which precipitated a fraud charge by the SEC and a large fine. (For more see October 3, 2018 Marketwatch article, “SEC settlement forces Tesla to give Elon Musk adult supervision.”)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Model 3 or Die

Tesla is now essentially betting everything on its Model 3, which is an attractive vehicle, but it is also unfortunately characterized by quality problems and poor internal design that complicates manufacturing. For example, there are 12 structural aluminum components in a Model 3 front fender vs. three in most modern cars, so the Model 3 requires more labor and energy to manufacture. Tesla is anticipated to have a growing glut of Model 3 vehicles and recently cut the price by $1,100 per vehicle to stimulate sales.

Too many Teslas have been catching on fire due to battery problems. Tragically, two of Louis’ daughter’s classmates were burned alive last year in a tragic Model S accident in Fort Lauderdale, which the NTSB is investigating. In the Fort Lauderdale incident, the car’s lithium-ion battery ignited twice more after the initial fire, as the Tesla Model S sedan was being loaded onto a tow truck and again at a storage yard. For a car using no gasoline, catching fire three times in a single accident sure does not sound safe.

One problem is that the Teslas are wired to accelerate faster than the Audi and Porsche electric vehicles, but it is bad for lithium batteries to get too hot under extreme acceleration. Tesla’s “ludicrous mode,” which is used to accelerate quickly, overheats lithium batteries and shortens their battery life.

VW Group rejected the dangerous “round” lithium battery cells that Tesla continues to use, and its new mission statement is to quickly surpass Tesla’s market share with higher-quality vehicles that utilize safer as well as longer-lasting lithium batteries. Both VW Group and GM will soon be making higher quality and cheaper electric vehicles than Tesla, so it is not inconceivable that Model 3 sales will keep falling.

Taking all of these issues into consideration, I think the odds are stacked against Tesla. I think the stock is a short, but not for the faint of heart. On top of all this, there is the economic cycle to worry about as Tesla has never operated at any scale during an economic recession. (The present U.S. economic expansion will be the longest in history in July 2019, running at over 10 years.)

Tesla is still a luxury car maker at a time when competition is intensifying, and its low-end strategy has not yet completely paid off. If there is a recession in the U.S. in the next couple of years, Elon Musk will find out the hard way that selling a premium product in a recession may cause a new stagnation of sales at Tesla, which is just today breaking cash flow positive, to become a heavily money-losing proposition.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. *All content of “Global Mail” represents the opinion of Ivan Martchev*

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