In a note Brinkman recently wrote, “We continue to be cautious relative to the potential for a slower than guided start to Model 3 assembly, and newly believe that the potential for Model 3 pre-orders cancellations may increasingly become a point of investor concern.” Nothing tarnishes a brand faster than producing a lemon or product that becomes synonymous with failure. I hate to tell Tesla lovers that owning a Tesla could rapidly become uncool if when rolled out the Model 3 fails to live up to the high expectations many of those placing orders have for the car.Enough about Tesla being worth more than Ford and all the other automobile producers that have many times its market share. Current supporters of its value even go so far as to claim it is really a tech company masquerading as an automobile company. It should be noted that J.P. Morgan analyst Ryan Brinkman welcomes margin improvements at Tesla and the reiteration of Model 3 timing, but said execution risks remain. He rates the stock underweight with a $190 price target, up from a previous $185. I and many other market watchers see both of these numbers as far too high.
Tesla has repeatedly tried to lower expectations and reiterated that the model 3 is a downgrade from the model S but many of those on the waiting list may not fully comprehend exactly what this means. Do not rule out the possibility that once the aura surrounding Tesla leaves, reality may wash over those so eagerly awaiting their new toys and a main driver of sales vanish. In a world where few cars sporting the Tesla nameplate exist the car remains a novelty that garners the owner a bit of notoriety. So far the attention gained has been positive, however, if it were suddenly to turn negative not only would many owners lose a bit of bounce in their step but the value of their cars could drop like a stone.
As this is written we are forced to wonder just how much of a downgrade the model 3 will be and how it will be received. Many questions still exist as to whether its roll-out will be on time or delayed by a series of glitches and problems that often plague new models. If the actual car fails to tantalize buyers or leaves them underwhelmed it could be all over. One is born every minute refers to a fool or sucker. There’s a sucker born every minute” is a phrase closely associated with P. T. Barnum, Buying stock in Tesla is the same as going to a casino, it will end with you being most likely a goat rather than a hero. Remember the companies Musk is involved with have been on the government dole.
Like many high-flyers before him, Elon Musk has a history of promising more than he can deliver which investors and the market has chosen to ignore. I have written several articles about Musk and Tesla not because I’m wowed by either but because they are both poster children of a market which I feel has discoupled from reality. Do not be surprised if looking back someday in the future we view Tesla’s stock which continues trading at incredibly high multiples as a reflection of our historically low-interest rates and the luck of being in the “QE moment” rather than the company’s financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life.
In the past, I and many others have pointed out the uphill battle Tesla is fighting and the many obstacles that could derail its success. In May of 2015 David Stockman wrote:
In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.
Oh, how sweet and challenging the auto industry is, like a fickle mistress it has those in its grasp always on their toes or they will suddenly find themselves crushed by their overconfidence. A marvelous example is how Ford in the 1950s ambitiously rolled out the car everyone was waiting for. Unfortunately, their ambition gave birth to the Edsel, whose name became synonymous with abject corporate failure and while the nascent brand was killed in 1959, its legacy lives on. The Edsel’s short history makes a fascinating cautionary tale for anyone in business–not just the car industry. In the end, the name of Elon Musk may be added to a long list of bold men herald and declared to be “gods gift to business,” only to find they flew too close to the sun only to crash and burn.