At Tesla, Elon Musk may be aiming too high
Ordinarily, Wall Street would be cheering a high-flying tech startup that reported earnings that exceeded the consensus forecast of Wall Street analysts. However, nothing is "typical" about electric vehicle maker Tesla (TSLA) and its equally colorful CEO Elon Musk.
Indeed, Musk, the native of South Africa who made his fortune as a co-founder of PayPal (PYPL), quickly quashed whatever positive feelings investors had over his earnings "beat" when he abandoned his earlier forecast that Tesla would free cash flow-positive this year.
As if that weren't enough, Musk also announced plans to increase the company's production rate to 500,000 vehicles in 2018, two years earlier than expected, and raising it to 1 million by 2020. UBS analyst Colin Langan estimates that Palo Alto, California-based Tesla will need about $2 billion to ramp-up production.
"Ultimately, we see the new volume targets as too aggressive, setting up investors for disappointment," wrote Langan, who rates the company's shares as a "sell," in a note distributed to clients.
After the shares climbed immediately following the latest earnings release on Wednesday, the stock traded down 5 percent, or $11.03, to close at $211.53 on Thursday. The shares have fallen about 12 percent this year, regaining some lost ground recently after Tesla announced that it has received about 400,000 preorders for its Model 3, which is due to go on sale in 2017.
Many experts say Musk's production goal is unrealistic.
"At 300-400 (thousand)/year, it would be the third-best selling (luxury) vehicle," behind Mercedes Benz and BMW, wrote Langen, who's skeptical that Tesla can produce the Model 3 profitably. "Customers may be underestimating the price with desired options and overestimating the EV (electric vehicle) tax credit."
CNBC's Jim Cramer went even further, accusing Musk of getting away with "financial murder" and noting that Tesla delivered only 14,810 vehicles in the quarter, below the company's guidance of 16,000. Almost 30 percent of the stock's float is held by short-sellers, investors who profit when a stock price falls, further highlighting the skepticism many have about Musk's plans.
Not surprisingly, Musk says the criticism doesn't bother him.
"As for convincing all the naysayers, I think that will basically be never," he said during the company's earnings conference call. "There's always going to be naysayers. ... what I find ironic about a lot of the naysayers is that they -- the very same people will transition from saying it was impossible to saying it was obvious. I'm like, 'Wait a second. Was it obvious or impossible? It can't be both.' Right?"
Another company associated with Musk, Solar City (SCTY), has plunged nearly 60 percent in the wake of disappointing earnings. The largest installer of solar equipment, whose board he chairs, is due to report earnings on April 9. Neither Tesla nor Solar City is profitable (Space X, the Musk company that's pioneering the use of reusable rockets, isn't publicly traded). Solar City is also a favorite of short sellers, who control about 40 percent of the stock's float.
At Tesla, Musk has set a high bar for expectations, so a lot hinges on whether he hits or misses those targets.