Is Tesla a purchase?

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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "You're here (NASDAQ: TSLA) may be the most hotly debated stock on the market. And in early 2019, the debate reached its climax. The company finished the year 2018 with 90,700 deliveries in the fourth quarter and is already planning an expansion of its production in the Chinese market. & Nbsp; "data-reactid =" 11 ">You're here (NASDAQ: TSLA) is perhaps the most controversial action of the market. And in early 2019, the debate reached its climax. The company finished the year 2018 with 90,700 deliveries in the fourth quarter and is already planning an expansion of its production in the Chinese market.

<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "As good as growth is, Tesla has struggled to earn as much money as it needs in the long run and failed to make the $ 35,000 pledged to model 3 promised to investors.With billions of debt maturing next year, Tesla is facing a future far from certain., and investors have a lot to think before you buy the stock. & nbsp; "data-reactid =" 12 "> If growth is good, Tesla has struggled to make as much money as needed in the long run and has not managed to win the $ 35,000 model 3 that investors had been With billions of debts maturing over the next year, Tesla is facing a future far from certain, and investors have a lot to do before buying back their shares.

Tesla Model S driving on a highway at the edge of the ocean.

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The Tesla Model S. Image Source: Tesla.

Tesla's growth machine is in full swing

The ramp-up of production of the S, X and 3 models resulted in a massive growth curve for Tesla, as you can see below. But revenue growth does not mean that Tesla is making money.

TSLA Revenue (TTM) Chart

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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "TSLA Revenue (TTM) given by YCharts"data-reactid =" 49 "> TSLA Revenue (TTM) Data by YCharts

You may find that Tesla has spent billions of dollars over the past five years, mainly for the construction of the Gigafactory plant in Nevada and its Fremont, California plant. If Tesla stopped investing in growth, it could eventually generate positive free cash flow, but here's where the fundamentals of the company and the pursuit of investment complicate the investment thesis.

Tesla does not earn as much money as he hoped

<p class = "canvas-atom web-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "When Tesla announced that she was lay off 7% of its workforce, it was not the redundancies that worried investors. Elon Musk admitted that Tesla was not close to manufacturing model 3 at a cost allowing a $ 35,000 version and / or a 25% gross margin that Musk had been planning for a long time. You can see below that the ramp-up of Model 3 coincided with a drop in gross margins – and this despite the fact that Tesla has only sold 3 high-priced models and now at high margins. & Nbsp; "data-reactid =" 52 "> When Tesla announced the dismissal of 7% of its workforce, it was not the dismissals that worried investors Elon Musk admitted that Tesla was far from manufacturing model 3 at a cost which would allow a $ 35,000 version and You can see below that the ramp-up of Model 3 coincided with a decline in gross margins – despite the fact that Tesla sells only high prices, high margins Model 3 until now.

TSLA Gross Profit Margin Chart

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The story continues

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "TSLA Gross Profit Margin (CTM) given by YCharts"data-reactid =" 70 "> TSLA Gross Profit Margin (TTM) Data by YCharts

The increase in production entails costs that will reduce margins in the short term. But Tesla admitted that he was focused on the more expensive models 3 and that he had to cut costs in order to sell the cheapest models promised. Until now, there is no evidence that it can bring money back if prices fall.

Without a high gross margin, Tesla will not be able to generate enough cash from operations to fund extensions in China or develop a Y-model or truck-trailer. And with the debt hanging over the company, she could face a lack of cash while she was trying to grow.

Debt is looming

The image of the margin and cash flow that I have described above is important for Tesla's debt. The company has $ 10.5 billion in debt (including short-term debt), of which $ 920 million matures on March 1, 2019 as a convertible note. There are mechanisms to convert this debt into shares (which would dilute the current shareholders), but Elon Musk said Tesla would repay the $ 920 million debt with cash.

TSLA long-term total (quarterly) debt chart

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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Total long-term debt of TSLA (quarterly) given by YCharts"data-reactid =" 88 "> TSLA data on total long-term debt (quarterly) by YCharts

Add to that a convertible debt of $ 566 million that will expire in November. Tesla must begin to generate positive cash flow quickly, otherwise it will massively dilute its shareholders. But instead of reducing its projects, the company aims to invest between 2 and 5 billion dollars to develop in China.

Elon Musk has always managed to find ways to finance the growth of Tesla, whether through debt or equity markets, but he must ultimately prove that the company can make money or markets will stop funding its growing debt. The risk is that we have already reached this stage with increasing debt yields, making it more expensive to incur more debt to finance future growth.

Impressed or scared?

Tesla's growth trajectory has been staggering and the way the company has advanced electric vehicles is incredibly impressive. But he did not prove that she could make money in the long run by selling vehicles and had to make layoffs not one, but twice in the last year to cut costs.

As losses increase, debt maturities become closer and Tesla either has to become a positive cash flow, find ways to finance its operations, or increase its debt, or issue shares, diluent thus the current shareholders. Nor is attractive if you plan to buy Tesla shares today.

<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The ambition has made Musk much advance in the But at this point, I think his company's inability to become a high-quality, low-cost manufacturer outweighs any fear that I feel for the growth of the company. Porsche, BMW, General Motors, and Jaguar enter the Tesla electric vehicle market, with unmatched infrastructure and quality. That's why I do not think Tesla is an action to buy, and I'll be a seller at the moment. "Data-reactid =" 94 "> Ambition has done a lot for Musk in the automotive sector., I think that his company's inability to become a high-quality, low-cost manufacturer outweighs all that I fear for his growth. Porsche, BMW, General Motors, and Jaguar enter the Tesla electric vehicle market, with unmatched infrastructure and quality. That's why I do not think that Tesla is an action to buy and that I would be a seller now.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " More from The Motley Fool "data-reactid =" 95 "> More from The Motley Fool

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Travis Hoium has no position in the mentioned actions. The Motley Fool owns shares and recommends Tesla. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy."data-reactid =" 103 ">Travis Hoium does not own any of the shares mentioned. The Motley Fool owns shares and recommends Tesla. The Motley Fool recommends BMW. Motley Fool has a disclosure policy.