Tesla Stock Forecast (NASDAQ: TSLA.O): Houston, We Have Problems!

Gleb ZInkovskii_photo



The article was written by Gleb Zinkovskii, a Financial Analyst at I Know First.



We’re running the most dangerous experiment in history right now, which is to see how much carbon dioxide the atmosphere… can handle before there is an environmental catastrophe. 
– Elon Musk, Founder and CEO of Tesla Inc.

[Image Source: Wikimedia Commons]


  • Model 3 weekly production rate target of 2,500 by 1Q end missed
  • Ratio analysis suggests “near red line” degree of leverage on Tesla’s balance sheet
  • Goldman Sachs does not believe the production plan will be met by the end of the year
  • The last autopilot accident (March 23, 2018. California, USA) does not seem to be Tesla’s vehicle issue

Tesla Inc (NASDAQ: TSLA.O) is not an ordinary company and as such one needs to analyze its performance from a different perspective. At the same time, the last events and rumors circulating around Tesla suggest that there are significant issues on the production lines and delivery rates of the “first mid-price electric car available to masses” – Model 3.This added to the recent fatal incidents involving Tesla vehicles negatively affects the company image, despite the fact that some financial issues were addressed, namely relatively low liquidity.

Tesla Model 3 Production Rates And Tesla Model Y Announcement

[Image Source: NY Daily News]

As Tesla is a car manufacturer the core production issues affect the stock price performance significantly. The most recent issue is related to the very core aspect of the production – the weekly Model 3 production rate. Elon Musk’s plan targeted on achieving production of 2,500 cars per week by the end of 1Q, but reported only 2,020 in the past week. Such miss of the target could not be gone unseen by the investment banks, and Goldman Sachs analysts reflected it in a report issued on April 10 and took bearish positions. Indeed, the company stock price was falling over the following week and ended up with loss of 2.65%.

[Source: Elon Musk Official Twitter Account]

At the core of Goldman Sachs opinion, the public found the analysis of the Musk’s promise to arrive to the figure of 5,000 Model 3 cars by the end of 3Q. This, combined with the plans to launch new product – Model Y, made the outlook of the company as more than overpromising. However, it seems that the market and the analysts’ community still see Elon Musk as a person who “make things happen” even against odds and based on Yahoo Finance information 8 of 23 analysts still take buy positions on Tesla’s stock.

[Source: Yahoo Finance]

In addition to the issues that follow the production of Model 3, Tesla unveiled the plan to start the production of its small crossover car – Model Y – in November 2019. As far as it gives another 17 months for Tesla to resolve all the bottlenecks in the production processes which slow the production now, the approach for the factories’ set up may be significantly revised. As such Elon Musk admitted that the production robotization level and complexity is so high that it indeed contributes to those bottlenecks. Finally, many Tesla fans who already wait in line for the their cars from 12 to 18 months, expect appearance of the dual-motor version of Model 3 which is supposed to be introduced as soon as the production rate for single motor Model 3 hits the target of 5,000 cars per week. All that requires from the company’s management to provide its investors and other stakeholders with more than promises, but a revised plan with clear and realistic path to arrive to the target production and delivery rates announced by Elon Musk earlier.

2017 Financial Results And Expectations For 1Q2018 Release

During the last interview that Elon Musk, Tesla Founder and CEO, gave to CBS channel, he mentioned that although the company currently goes through rough times of improving the production processes, he assured the public that Tesla will become profitable company by the end of Q32018 and onwards. At the same time, he mentioned that investors and analysts should not just use retrospective approaches to value and predict the Tesla, performance, but rather exercise forward-looking approach by utilizing the most recent available information and try to investigate effects of the current policies and actions undertaken by the company in the nearest future.

That said, based on the last released financial statements for 2017 and the accompanying newsletter we can observe that automotive revenue in Q4 increased by 36% over Q4 2016, mainly due to 35% growth in vehicle deliveries. Another important highlight is that approximately 23% of Q4 deliveries were subject to lease accounting, which was slightly higher than in Q3. As such, Tesla closed a $546 mln. asset backed securitization of Model S and X lease portfolio, which was Company’s first such offering. This deal will make available significant leasing capacity for long-term growth.

With the release of the 1Q2018 financial results expected to occur at the end of April – start of May, everyone is interested in finding out whether the production rates of 2,500 Model 3 cars weekly was achieved and what’s the corrected view on achieving 5,000 cars weekly by the end of 2Q2018.

Ratio analysis

With the date for the 1Q2018 results official release coming in it is worth to investigate the financial ratios that are particularly relevant for automotive industry. Based on the available information about the financial results over 2017 fiscal year the following ratios were calculate for Tesla:

[*Credit for the industry average data: MarketWatch]

Based on the above one can reasonably argue that Tesla is not just an outlier from its competitors like Daimler or GM but is in deep recession. It is partially true, especially in case of debt position of the company as the industry’s “red-line” is around 250%, while the difference with the industry’s average is almost 80% and 30% in cases for Long Term Debt to Equity and Total Debt to Equity ratios, respectively. However, the commonly acceptable financial standards for automotive industry tells us that another important metric which the Inventory turnover is, effectively meaning the amount of time it takes to clear the produced inventory, is more that 50% lower than the industry average. That is expected as the demand for Tesla cars is far exceeding the supply capability of both Gigafactory 1 and the Freemont production facility. Finally, the Return of Equity, which ultimately is the most interesting metric for investors, is far below the industry’s average and it makes it easy to agree with Goldman Sachs analyst team that Tesla will need at least a miracle to improve it, unless it taps into capital markets to inflate the cash pillow for its production.

Developments on the autopilot functionality

[Image Source: BBC]

The well-known by the public Tesla’s Autopilot is a semi-autonomous mode in which the car controls its own steering and speed. However, the company has always stressed that drivers must pay attention to the road situation and always keep their hands on the steering wheel.

Despite that there are already a few instances when Tesla vehicles were involved in accidents, and even fatal ones, while rolling in “Autopilot” mode. The most recent instance occured on 23 March, when a Tesla vehicle crashed into a roadside barrier in California, killing 38-year-old Walter Huang. Based on the Tesla’s information, “the driver had received several visual and one audible hands-on warning earlier in the drive”. As far as this feature of Tesla’s vehicles is one of the most desirable add-on costing some $5,000, every single accident gives more shade on this feature and overall Tesla’s reputation. Despite that the company has a sophisticated infrastructure allowing the team to keep log of the events leading to accidents and vehicle’s interaction with its driver, the company needed to do something to make driver pay more attention to the road. This is especially important in the case of Model 3 which relied on the interaction with the driver through the main touch screen display and the autopilot feature. On March 29,2018 Tesla released the statement saying that the new software update will provide steering wheel buttons access to car’s autopilot functionality, effectively meaning that drivers will always be able to keep their hands on the steering wheel and safely use autopilot functionality like changing distance to the next car or cruising speed. For Tesla stakeholders it means that the company provides its users with the most functionality that makes the driving process safe and encouraging public to treat the Autopilot system as an add-on to the driving process, rather than the replacement of the driver. Ultimately, it should make less space to put blame on the company and the car systems in case of accidents reducing the risk of legal claims against Tesla in future.


[Image Source: Techcrunch]

Tesla is one of the most debated topic in the financial and automotive community worldwide. The hype around this company produces so much news that it becomes harder and harder for investors to distinguish between the true and fake one. However, the recent events, especially the Goldman Sachs report release, pushed the company stock price into slide of and what is more important it significantly shook the Tesla’s image in the eyes of the stakeholders. Even the fact that Tesla’s management addressed the financial liquidity issues of the company and undertakes measures to eliminate the bottlenecks in the production processes, the production rate targets seem to be unattainable for now. Therefore, I would consider hold-buy position and will keep tracking the upcoming developments on the Gigafactory and Freemont plants, as well as the 1Q2018 results release. My position is supported by the most recent I Know First forecast on Tesla’s stock (NASDAQ: TSLA) as described in the below table:


Past I Know First Forecast Success with TSLA

In a forecast dated January 8th, 2017, I Know First’s algorithm indicated strong growth for TSLA. On January 8th, 2018, TSLA returned 46.90%, showing the accuracy and precision with which, I Know First has recommended TSLA in the past.


Current I Know First subscribers received this bullish forecast of TSLA on January 8th, 2017.

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I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm, allowing the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.