By CCN: In less than one month, the share price of the Tesla stock has dropped from $273 to $211 by more than 22.7 percent following the fall out of recent trade discussions.
While Tesla bulls remain optimistic about the long-term prospect of the firm, some strategists are concerned about the cash flow of the business and the performance of the company in key markets such as China.
Intensifying criticisms from short sellers, a report of an alleged autopilot system malfunction, a serious cash flow issue, and the ongoing trade dispute between the U.S. and China are said to have contributed to the underwhelming performance of Tesla in the first half of 2019.
Tesla Will Struggle in China With Tariffs
According to an email sent out to employees by Tesla CEO Elon Musk obtained by Reuters, Musk warned the company may face a serious cash flow problem in less than ten months if it does not begin strictly controlling its expenses.
Musk reportedly wrote:
It is important to bear in mind that we lost $US700 million in the first quarter this year, which is over $US200 million per month. That is why, going forward, all expenses of any kind anywhere in the word, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must (be) reviewed.
This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable.
The pressure of the cash flow issue of Tesla on the company, which was somewhat alleviated when the firm switched its target for a new capital raise to $2.7 billion, is likely to grow as the tension between the U.S. and China worsens.
In late 2018, prior to the suspension of tariffs on automobiles by China, Tesla was selling its Model S and Model X with a $20,000 premium due to the 25 percent import duties.
While the Model 3 costs $35,000 to $50,000 in the U.S. market, Tesla was selling the model in the range of $83,500 to $99,400.
“When Tesla first opened orders for Model 3 in China in November, only the Long Range all-wheel-drive and Performance versions were available and they respectively started at 580,000 RMB (~$83,500 USD) and 690,000 RMB ($99,400 USD),” Electrek reported.
As the Chinese government suspended tariffs for three months, Tesla was able to lower the pricing down to $72,000 and as the prospect of a trade deal improved, it seemed as if Tesla was on track to maintain a sustainable price range for its product.
However, the recent fallout between Chinese and U.S. negotiators poses a crucial problem for Tesla; it may lead to the imposition of 25 percent tariffs on automobile imports for an extended period of time, possibly until 2020.
Short Sellers Not Convinced
Accipiter Capital Management Founder Gabe Hoffman, a short seller of Tesla, said that the demand for the company’s products has dropped noticeably in the U.S., putting the business at risk of further decline.
The biggest issue for the stock is that Elon Musk — basically the lying magician — is not able to tell investors or his, you know, cult followers, ‘OK, here's this bright shiny object in the future like a Tesla Semi or like a million Robo taxis’ like he was saying yesterday, or like an auto insurance company a month from now, like he said on the conference call.
They're starting to focus on the actual business and the business has completely collapsed. Demand has declined very significantly in the U.S. And even when people knew the units number, because they disclosed that on April 3, the company still missed the revenue number by 11% because the pricing has gone down so much to move metal.
Whether Tesla would be able to bounce back in the second quarter of 2019 and maintain healthy cash flow by the year's end remains uncertain. But, the threat of the trade dispute on the outlook of one of the firm's key target markets remains real.