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Why Tesla Stock Remains A Strong Sell

Analysts figure they’ve given enough rope to Tesla to hang itself. This week, at least three of them (from Citigoup, Morgan Stanley and Wedbush) issued decidedly negative reports on the company. This isn’t a difficult thing to do at all given its eccentric CEO and his determination to remain in control despite burning away billions in cash and sending Tesla deeper and deeper into debt.  

So Musk continues to make lofty promises of becoming a robo taxi company when the auto business itself is still struggling. He is still short of his promised delivery targets. While January-to-March production totaled 63,000 (about 5,250 a week), the company says it is doing 900 Model 3 cars a day now with 7,000 vehicles per week on the horizon. Tesla’s forecast calls for 360,000-400,000 units by year end, so 7,000 a week for the remainder of the year could get Tesla within sniffing distance of that target.     

Even if the company manages to reach that target by some miracle, there’s a question of profitability. The federal tax credit started phasing out in January leaving Musk looking for ways to lower car prices any way it could. Since Tesla is still in the process of ramping up production, this is no easy task. So a referral program had to be scrapped and store closures had to give way to online sales. An even after all that, Model S prices, promised at $35,000 now cost $42,900.

Profitability (it lost $702 million in the first quarter) or at least breakeven is extremely important for the company, which is now looking to cut costs any which way it can. But there seems to be some doubt about its ability to get there, because Musk had to promise investors a new revenue stream (robotaxis, by 2020 no less) in order to get them to cough up another $2 billion this month. At the current cash burn rate, the company will burn through the cash in 10 months.

If all this wasn’t negative enough, there’s significant competition out there. Volkswagen for instance is setting up two Chinese factories that will churn out 600,000 electric vehicles (EVs) a month. The goal is to produce 70 battery-powered models across its 12 auto brands by 2028 to make 22 million EVs over the next decade. All the traditional automakers have much more experience (can design new models far easier and go to market with them).

Tesla in comparison has barely 2 beautiful models (Model Y is still in the tooling/blueprinting phase), its own battery and some nice technology. Moreover, the flagship China factory it is building may become a victim in the trade war.

As far as its chances of entering the $500 billion robo taxi market next year to compete with Uber and Lyft is concerned, let’s just say that the chances are slim. The National Transportation Safety Board NTSB reported this week that its autopilot system was involved in yet another fatal crash.

Wedbush analyst Daniel Ives says it well: "With a code red situation at Tesla, Musk & Co. are expanding into insurance, robotaxis, and other sci-fi projects/endeavors when the company instead should be laser focused on shoring up core demand for Model 3 and simplifying its business model and expense structure in our opinion with headwinds abound."