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Tesla Hits Goal, Stock Drops. What Gives?

Shareholders of electric car maker Tesla (NSDQ: TSLA) are accustomed to crazy rides. But they really had to buckle-up this week. The company met its production goal, but shares got slammed.

You might be tempted to say it was a classic case of “buy on the rumor, sell on the news.” But if you delve deeper, other reasons emerge that provide broader investment lessons. Let’s take a look under Tesla’s hood.

Tesla’s long-awaited announcement regarding the production of its Model 3 cars hit the wires over the past weekend. The company crowed that it had finally produced more than 5,000 of its Model 3 vehicles in one week.

Tesla has been scrambling to make this self-imposed deadline. CEO Elon Musk promised that the company could produce 5,000 Model 3 cars in one week by the end of June 2018. The eccentric billionaire has been forced to move that deadline twice before.

The company set up additional factory space in a tent and Musk himself tweeted that he’s been sleeping under his desk and basically living at the factory to ensure production levels hit this mark. All workers were told to report to work this weekend to help secure the precarious metric.

Bulls sat by their Bloomberg terminals awaiting the mauling of the bears Monday morning. At first, the stock gapped up $22 to $365. But as the market is wont to do, it delivered an unexpected twist. The stock quickly sold off and at one point traded down as much as $12.

Most Tesla holders are accustomed to volatility in the stock, but a $34 intraday move is enough to unnerve the calmest investor.

For those of you living under a rock, Tesla is a battleground stock. Both bulls and bears state passionate cases defending their stance. The zealots on either side battle it out on Twitter and it’s hard to find a day without the stock in the headlines.

As the chart shows, the stock over the past year has been on a roller-coaster ride (data as of market close, July 2):

As with most battleground stocks, Tesla is unprofitable. Although revenue is expected to grow from $4 billion three years ago to almost $20 billion this year, the company is losing more money than ever. Worse yet, it is burning through cash rapidly as it spends to expand and fine-tune production.

Tesla spent $4 billion in capital expenditures over the last 12 months, which brings the total spend to more than $9.1 billion since 2013.

Because the company doesn’t generate profits to help fund those expenditures, it financed this spending by issuing stock and taking on debt. As of the end of the first quarter, the company had almost $10 billion in net debt (debt less any cash on hand).

Behind the Wheel

The weekly production number on the Model 3 is critical. Most analysts believe this production volume will allow the company to generate profits and sufficient cash flow to avoid another capital raise.

The Model 3 is Tesla’s answer to a “mass market” car. Its base price tag of $35,000 is significantly less than the $75,000 Model S. High volume production of this model car will put Tesla on the map as the company that brought electric vehicles to the masses.

Bulls argue that with enough volume, the Model 3 can produce plenty of profits.

Layered into the latest Tesla press release are a few qualifiers that may have sent the bulls fleeing. Of the 28,578 Model 3 cars built this quarter, roughly 35% of them are “in transit” and will not be delivered to customers until the third quarter.

The company can’t recognize the revenue from these cars until they are delivered to customers, casting doubt on how bulls will triangulate the profitability of those cars.

Also rattling the bulls is Elon Musk’s new production milestone set for this summer. He now believes Tesla can produce 6,000 Model 3s per week by “late next month.” Seeing that the press release is dated July 2, we assume he means by the end of August.

Almost 30% of Tesla’s freely tradable shares (the float of the stock) were sold short going into the announcement. Match that against Musk’s long-term incentive plan which is tied to the stock’s market cap reaching $650 billion in 10 years and you’ve got the makings of an all-out war between the bulls and bears. The stock’s current market cap is $58 billion.

Instead of giving the bulls a moment to celebrate, Musk has instead delivered another exuberant goal for them to sweat out. Seeing how laborious it has been for Tesla to hit the 5,000 unit production number, the new high bar will fan the flames of the battle.

I haven’t been involved with Tesla to date. I find the jarring moves impossible to predict and with little solid basis for valuation, it’s hard to make a rational bet on the stock. I will be watching and waiting though, to see how serious investors either reward or punish the stock for reaching its goals.

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