We Hate Tesla's Stock in October

 | Oct 03, 2017 | 11:00 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:


I was tasked by Real Money's editors to identify two stocks that I believe will decline in October. The two I picked weren't chosen because of the potential for exogenous shocks, calamitous market crashes or other such October surprises. No, I believe they will decline next month due to the most basic of fundamental stock catalysts: quarterly earnings reports. 

One of the stocks I picked is Tesla (TSLA) . Its management has not announced an earnings date, but last year Tesla reported third-quarter earnings on Oct. 26. I believe this year's third-quarter earnings report will be a day of reckoning for Tesla shareholders. TSLA burned through $1.4 billion of cash in the second quarter and $2.4 billion for the first half in total. I calculated those figures by subtracting cash used for investments from TSLA's negative operating cash flow, so they represent the performance of the core business itself, apart from capital raising. 

That's what the market is missing here. Tesla's launch of the Model 3 isn't the proof of concept the market desires. Rather, Tesla's inability to generate positive cash while producing only upper-luxury models is proof that the company cannot produce positive cash flow and is unlikely to as it moves down market with the Model 3. It becomes an endless cycle of capital raising, and the amounts raised are mind-boggling. Tesla announced with a press release the closing a $1.8 billion debt offering on Aug. 15. Will it have any of that cash left in 2018? The third-quarter earnings report will provide more clarity, but I believe the answer is no. 

The fact that the debt-issuance press release was Tesla's last corporate communication indicates why October will be a disappointing month for TSLA holders. I was a sell-side auto analyst for 11 years and I am old enough to remember the whirring of the fax machine as the automakers put out a constant stream of sales data, product information and other miscellany. Tesla is the opposite. Tesla management says as little as possible, does not provide monthly sales data, and CEO Elon Musk's tweets are often management's only communication with the investment community. 

That lack of corporate communication is more than frustrating as an analyst, but it is also an impediment to a long position. There's so little data on Tesla that the chance for an earnings miss is so much more likely. TSLA doesn't have earnings per share, so third-quarter EPS don't really matter, but analysts will be keenly focused on third-quarter cash burn. I believe it will be in excess of $1.5 billion. That's the killer number, and that's why TSLA shares will decline in October.

I'll reveal my second October pick in my next post.

Columnist Conversations

Most investors have given up on Vera Bradley (VRA) , but the punishment may not fit the crime, and the company...
When the whole world sells off everybody wants to assign a reason for the action. Today's suggestions: 1...
For the first time since early February the down volume as a percentage of total volume on the NYSE is over 90...



News Breaks

Powered by
Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.