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In the intense battlefield that is You're here (NASDAQ:TSLA), bulls and bears can win a victory this week. Tesla stock plunged Thursday because of weak delivery figures in the first quarter. But TSLA's stock may well come together after a court victory for CEO Elon Musk.
Musk was in court after the Securities and Exchange Commission (SEC) alleged it violated a settlement by using Twitter (NYSE:tWTR) to provide important information. But Justice Alison Nathan dismissed Musk and the SEC unanswered, leaving two weeks for both parties to draft a new agreement. Given the legitimate fears of a possible ban on Musk from sitting as a director or officer of Tesla, the news seems like a victory for the struggling CEO.
But Wednesday's news is much more important for Tesla's action than Thursday's. A ban on D & O was highly unlikely. In the aftermath of the "secured financing" debacle, few investors have any confidence in Musk 's Twitter timeline as a reliable source of information.
Delivery figures, however, raise real concerns. The story of Tesla's growth is in question, and with a market capitalization still at $ 46 billion, this is the biggest problem for the Tesla stock.
Musk Getaways
Thursday's appearance in Musk's hearing room looks like a victory. On the one hand, the renegotiated settlement seems likely, at worst, to be only one reiteration of the original agreement, with perhaps more details. Musk has already said that he does not "respect the SEC" – and may well violate this deal again. But in the meantime, there should be little change for Tesla.
More importantly, the SEC told Justice Nathan that she was not trying to fire Musk as CEO anyway. His lawyers instead called for "ever-increasing fines" if Musk continued to violate the agreement.
All bears who expect Musk to be fired – or suspended – from Tesla are probably disappointed. But given the longstanding management issues here, some bulls may also be disappointed. After a few months, with a series of non-forced mistakes and a steady stream of executive exits, more than a few shareholders would probably not want Musk to leave his position or have more help.
Deliveries Send Stock TSLA down
Nevertheless, in most cases, SEC news does not change much the arguments for or against the Tesla title. As even shorts have pointed out, the Herbalife (NYSE:HLF) proved that regulators did not want to take the risk of taking businesses by punishing their managers. And although Musk may be the creative genius of Tesla, his execution has recently failed.
The number of deliveries can not be ignored. Tesla delivered only 63,000 cars during the quarter, down 31 percent from the fourth quarter. This is a huge problem for a company that is supposed to dominate the electric vehicle market. And a company that – according to Musk (and many TSLA bulls) – has had more demand than it could serve.
Tesla noted that some 10,000 cars were in transit at the end of the quarter. And he reaffirmed his forecast for annual deliveries of 360,000 to 400,000 people. Investorplace Luke Lango emphasized these facts by saying that the numbers do not break the bull of the TSLA shares. But I respectfully disagree.
First, Tesla had close to 3,000 vehicles in transit at the end of the quarter before that – which, apart from that, still dropped significantly. Second, the quarter greatly increases the likelihood of a capital increase.
Tesla will spend money operating during the quarter. On March 1, it repaid its convertible debt of $ 920 million in cash. It has to finance part of the new Gigafactory factory in Shanghai. The company wrote in its press release that it had "sufficient liquidity" at the end of the quarter. The question is: enough for what?
The central problem for Tesla Stock
In a sense, the events of Wednesday and Thursday brought to light the concrete case of Tesla's actions – a case for which I put my own money. There is so much noise around the "FUD" court and the Musk mission and the myriad of allegations of irregularity or, sometimes, flagrant fraud. The SEC battle feeds all this.
But the problem underlying TSLA actions is simpler and more fundamental. The essential, the case of TSLA is based on the idea that the company will be the most efficient car manufacturer in modern history.
Its gross margin targets of 25% for Model 3 are much higher than those of its US competitors. Ford (NYSE:F) and General Motors (NYSE:GM), and even the Japanese giant Toyota Motors (NYSE:TM). The long-term growth of its sales is based on maintaining its clear lead in the electric vehicle market. As Musk himself has repeatedly emphasized, car manufacturing is an extremely difficult business and one must support a valuation of more than 50 billion dollars (and therefore a positive potential for the Tesla title ), Tesla must do it better than anyone else.
The short case for TSLA
Tesla does not do that. He does not come near. Musk said the company was building its own car carriers. She then acquired a trucking company last month. Shipments have just dropped, including a 50% drop in the S and X models, Tesla's most profitable cars.
If Tesla is no more effective than its rivals, the TSLA stock is overvalued. It's so simple. In the meantime, the first quarter figures are a sign that the demand may not match what Tesla thought was – and the huge end-of-quarter scramble to service the foreign markets suggests that logistics improvements important are needed.
None of these risks seems to be predicted in Tesla's stock at the moment. And it's these issues that are the basis of the real deal, not complaints about what Elon Musk said on Twitter.
At the time of writing these lines, Vince Martin bypasses Tesla under a covered call option position.
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