Tesla stock has been slaughtering bears in a time of crisis where most assets are cratering. Shares of the electric vehicle maker have surged more than 85% since bottoming out a month ago.
And while the wider market has rallied too, the S&P 500 has only managed a 21% recovery over the same stretch.
Analysts struggle to explain what’s driving Tesla’s surprising resurgence. And unfortunately for TSLA bulls, an in-depth look reveals that the Silicon Valley-based automaker is in trouble.
Investors were ultra-bullish on the stock in early 2020, and they rabidly bid it up to an all-time high of nearly $1,000 per share.
Along with a historic short squeeze, the stock benefited from Tesla’s confident assertion that it could deliver at least 500,000 vehicles by the end of December. But due to the coronavirus pandemic, the company is very likely to miss the target.
Tesla’s Fremont factory, which has the capacity to produce 500,000 vehicles per year, suspended operations when local officials implemented shelter in place policies.
With the facility in limbo, a team of MIT engineers and Wall Street analysts predict that the electric automaker will only produce 50,000 vehicles this quarter. That’s a far cry from the 103,000 vehicles that Tesla produced in the first quarter.
While Tesla plans to resume production on May 4, the researchers believe that the timeline is optimistic. They wrote,
The coronavirus continues to spread in the U.S., and we believe that total COVID-19 cases in the U.S. aren’t likely to peak before early May.
Even if production resumes, vehicle sales are likely to take a painful hit. Travel restrictions and a struggling economy give consumers very little reason to buy new cars – especially luxury models.
While Tesla shares continue to rise, the electric car company is implementing cost-cutting measures to soften the blow of the coronavirus pandemic.
Tesla just sent its landlords an email seeking rent reductions. According to the Wall Street Journal, the email said:
The rapid world pandemic that is now affecting our country has led Tesla to make strategic decisions to ensure the company’s long term success and growth. As a result of the increasing restrictions on our ability to conduct business, we would like to inform you that we will be reducing our monthly rent obligations effective immediately.
The company’s penny-pinching strategy jars with its resurgent stock price.
Bulls may be banking on Tesla’s $6.3 billion cash reserves to help the company get through the pandemic. But a closer look at the company’s financials reveals that it has debt obligations worth a whopping $4.2 billion between 2021 and 2023.
Tesla’s massive debt liabilities explain why the company is scrimping on all fronts. Decision-makers probably know that the crisis has made Tesla vulnerable.
As production halts and sales take a huge blow, it is quite possible that the company’s free cash flow may turn negative. Should that happen, the electric vehicle company will have a hard time servicing its debts.
After the pandemic is over, things might eventually start to turn around for the company. But for now, Tesla stock is facing headwinds that do not justify its valuation.
Unless the company can find a way to make up for lost time, the rally will eventually fade – and bulls will regret not taking profits when they had the chance.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.