2 Reasons Why You Should Sell Tesla

Increasing capex and growing competition are headwinds for company

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May 18, 2016
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Tesla’s (TSLA, Financial) stock has pulled back considerably since I recommended shorting the stock a few weeks ago. Although the Model 3 hype has kept Tesla’s shares above $200, there are many reasons why Tesla is likely to continue heading lower.

Intensifying competition

Tesla’s Model X is a bigger vehicle as compared to Jaguar’s F-Pace SUV as it can fit comfortably up to seven people if you spend additional $5,000. The Jaguar F-Pace would not be the perfect SUV for every person.

However, the viable race between Tesla and Jaguar has some fascinating similarities. Both the firms were retailing sports automobile and top class sedans. Tesla came from nowhere, and some percentage of its sales to date apparently came at Jaguar's expense. However, Jaguar is now fighting back. Tesla introduced its first SUV a few months earlier than Jaguar. But Jaguar is now giving serious competition to Tesla with its first SUV.

Apart from this, Jaguar is not the only company to give tough competition to Tesla. Mazda is another tough competitor of which Tesla should be wary.

Accelerating capital expenses

Bearing in mind Tesla’s 2016 goals, one of the company’s accomplishments worth emphasizing was its strategy to surge sales this year by over 60% while concurrently declining yearly capital expenses. And according to the company’s first quarter results, it easily tailed through with this strategy, as capital expenses declined 47% successively to $217 million, considerably below the quarterly run rate obligatory to stay lower than its prior 2016 capital expenses estimate of $1.5 billion.

However, in the company’s first-quarter stockholder letter, management scratched the capital expenses together with its strengthened production aim.

Keeping in mind the company’s plans to improve its 500,000 overall unit build strategy, fundamentally magnifying the previous growth idea, the company is revaluating its level of capital expenses. The company anticipates that it will be approximately 50 percent greater than its prior guidance of $1.5 billion this year. According to this, 2016 capital expenses will reach almost $2.25 billion, a lot more than its 2015 capital expenses of $1.6 billion.

Apart from this, it is obvious that the company’s plan of building 500,000 units will have negative influence on its ability to be net cash flow positive this year.

Conclusion

Tesla has managed to sustain its lofty valuation for a long time; however the company faces several headwinds going forward. Due to the concerns mentioned above, investors should sell Tesla.

Disclosure: The author doesn’t have any position in the stock mentioned in the article.

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