Tesla’s stores once offered the promise of a one-stop shop for electric cars, solar panels and battery storage. Less than three months ago, the company announced 11 new store locations across the country. Just a few months later, Tesla is shuttering most of its stores in a bid to cut costs and going online. The long-promised $35,000 version of the Model 3 is finally being offered but not before a spate of price cuts that suggest a slowdown in sales especially in the US. The company revealed that it is currently making cars for Europe and China only.

Elon Musk, Tesla’s CEO, is unraveling. In announcing closing of its stores, he said that the company would no longer offer test drives, and that all sales had to be completed by computer or smartphone. Tesla’s finances are dwindling as well. It laid off 7 percent of its workforce in January and the company had to use up a quarter of its available cash last week to make a $920 million payment to bondholders. And despite that, Musk continues to insist that the Tesla will need no additional capital raise. 

Tesla’s owners are like the “Old Faithful” and until now Tesla’s investors were too. But patience is running thin as Tesla stock drops with every bit of bad news and is not about to spring back up given the company’s woes.

Future Wealth’s View

There is a saying in Wall Street – “Buy the stock, not the product”. Investors would have done really well if they had bought Apple stock when standing in line to buy the iPhone 5. Likewise, customers who stop by Starbucks every day to work, would be sitting on a load of gains, had they bought the stock along with their first cup of Venti Ice Coffee Caramel Macchiato. Tesla is proving the reverse – “Buy the product, not the stock”.

Peter Lynch of Fidelity Magellan – one of the most successful fund managers of  all time, often quoted – “The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.” Anyone with a decent understanding of company research can see all kinds of red flags in Tesla’s finances, its board and of course, its CEO. But, its product has surpassed all expectations and has been extremely successful, despite that fact that it has never delivered on time and never for the price that was promised.

Which brings us back to the question – Why is Tesla going online only? The answer lies in some ill-advised contracts that Mr. Musk penned himself – the company has $1.6 billion in lease obligations for prime property leases, with $1.1 billion due between now and 2023. Most of these leases run between 5 – 10 years and there is no way for Tesla to break these leases by simply announcing that they are going online and no longer need store front offices. If you think the sleazy automobile salesman is the worst of our kind, you haven’t met any rental property landlords.

And, there is the thorny subject of Tesla’s balance sheet. At last glance (Dec 31, 2018), Tesla’s balance sheet shows $3.7 billion in cash and equivalents but, $3 billion in payables and liabilities and another $10 billion in long term debt. Despite all the bad news, Tesla’s investors are unlikely to jump ship and move on to other investments. But, they would do well to listen to Peter Lynch who famously said that “Owning stocks is like having children — don’t get involved with more than you can handle.”