Tesla – a share price in need of a spark

Tesla has seen its share price struggle in recent months, as concerns over delivery numbers and questions regarding its SolarCity acquisition deter investors. 

Tesla is, remarkably, finally managing to get its ducks in a row, at least on the car front. Delivery numbers are starting to pick up once again, at least according to a press release from the beginning of October. Third quarter Deliveries were up 70% compared to the second quarter figures, with production rising 37% to 25,185 for its third quarter.

One area of concern regarding these figures is the amount of discounting that has gone on, with Tesla having slashed prices in order to boost demand. As a result, the market will be keeping a close eye on margins in the earnings update.

The second quarter automotive gross profit margin was 21.2%, which represented an improvement on Q1’s 20.1%, so Tesla needs to maintain this direction of travel. The company has said that it aims to increase automotive gross margins by around 2-3 percentage points in the third and fourth quarter.

So far, so good. However, when investors look at Tesla, they are realising that shares in the company don’t just encompass a car maker that is finally seeing mass-market traction.

It also covers SolarCity, another company owned by Tesla’s founder, Elon Musk. There are parts of SolarCity’s model that look interesting, but fundamentally, the company is struggling, with a debt pile of around $2.6 billion. A billion dollars’ worth of debt payments is due by the end of 2016 alone.

SolarCity’s market cap is now below its debt, with Tesla buying up the firm for a premium of $500 million, and is a deal larger than those currently being carried out by General Motors and Ford – these two ancient titans are buying up firms that are add-ons to existing businesses, with GM acquiring a self-driving technology firm and Ford picking up a bus service that buys a lot of Ford vans. Tesla, by contrast, is chucking cash away on a deal that could sink the company before it acquires the critical mass that has been promised for so long.

The share price chart tells the same story. Tesla touched an all-time high in April 2014, but since then it has steadily drifted lower, with each peak, in July 2015 and then April 2016, being lower than the April high.

Admittedly, it did bounce from February 2016, in line with the broader market, but at that point it was trading on 95 times forward earnings, a figure that was cheap by Tesla’s standards (the 2-year average is 152, and the current forward PE is 186).

With this undervaluation since corrected, we have seen the stock drop again, and while for now it shows no desire to go below the June low of $186.50, it is heading in that direction. A failure to post encouraging numbers could see this level, which provided big support in early 2015 as well, broken. This would clear the way to revisit $176.60, the May 2014 low, and then the February 2016 low at $135.25.

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