The Genius Musk and His Failing Grades

By John Del Vecchio  |  May 2, 2019

Every time Elon Musk opens his mouth these days, it causes headaches for Tesla (Nasdaq: TSLA) shareholders.

From getting in trouble with the Securities and Exchange Commission over tweets to smoking a doob live on Joe Rogan’s podcast, he’s created a lot of bad headlines in recent months.

The thing is, Elon has developed a cult following. And that can be dangerous for shareholders.

I recently watched the wonderful HBO documentary The Inventor about Theranos founder Elizabeth Holmes. Holmes bamboozled investors — including former Secretaries of State Henry Kissinger and George Shultz and a bunch of other old white guys — out of hundreds of millions of dollars.

She made a $9 billion market valuation from an empty shell of a company.

No one bothered to look at the financials.

It’s easy to get sucked in by cult figures. Musk has sucked a lot of people in.

While Tesla is a legitimate business, investors should be careful in anointing the next Steve Jobs. There may be only one.

When charismatic figures helm a company, it pays extra to cut through all of their bullshit and look at the numbers.

My software, the Forensic Accounting Stock Tracker (FAST), has thrown up warning signs regarding Tesla stock for a year now. In fact, Tesla is the lowest-ranked stock in the FAST model.

Someone has to be the worst. It just so happens to be Tesla. It’s nothing personal, as the process is purely objective. And the numbers say there’s plenty to be worried out.

Investors have started to pay attention to those red flags. That’s why the stock has cratered.

The first red flag is that customer deposits have been on the decline. In addition, new sales recognition standards have artificially boosted Tesla’s revenue generation. Neither bodes well for the near future, as these factors weigh on the company’s revenue performance.

Expectations have always been high for Tesla. There’s been almost nowhere for expectations to go but down. It scores an “F” here. If Wall Street loses all confidence, there’s still a lot of air under the stock price; shares could fall a lot more as estimates are revised down.

That confidence may already be starting to erode, judging by the “ho-hum” reaction to Musk’s recent declaration that Tesla-made robo-taxis would be ready by the end of 2020. It could happen… but it’s not likely.

Returning to the numbers, it’s been obvious for some time that Tesla would need additional financing. And it recently announced it may indeed seek alternative sources of capital. But management expects cash flow to be enough to support the business.

Here’s the rub…

Cash flow quality is in the dumps. And the cash flow return on invested capital is a major loser. Cash flow performance is deceiving on the surface, as FAST suggests a lot of it is short-term and unsustainable in nature. Accrued expenses and accounts payables have been key drivers in generating cash flow. That won’t be sustained.

Eventually, you must pay the piper.

And that’s another “F” on the report card for Tesla.

At the end of the day, Tesla is just not very shareholder-friendly. It doesn’t pay a dividend, and shares outstanding have ballooned in recent years.

It’s the exact opposite of what we love most in Hidden Profits: Show us the money and pay us first!

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John Del Vecchio

John Del Vecchio is the author of the bestselling book, Rule of 72: Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio.

As the in-house stock market guru and forensic accountant for Dent Research, John stood on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, and built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around.

John is also the executive editor of our Hidden Profits newsletter and our trading service Small Cap All-Stars.

He graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.MORE FROM AUTHOR