Tesla Faces Investors Concerned with Shifting Demand and Debt

May 23, 2019

By Rebecca Heilweil

Tesla, with its embattled CEO Elon Musk still at the helm, has failed to keep once supportive investors confident as it faces product safety concerns, speculation on waning demand, and growing debt.

On Wednesday the electric car manufacturer's shares dropped below $200 for the first time since December 2016. As of the market's close on Thursday afternoon, shares remained below the threshold at just over $195.

Partially fueling investor concerns are comments made by Morgan Stanley analyst Adam Jonas on a private call with clients Wednesday first reported by Business Insider. The longtime Tesla bull said the company will experience greater supply than demand — a relatively new problem for the manufacturer — and doesn’t have the growth to address its growing debt. Analysts at Wedbush and Citigroup have echoed Jonas’ views.

In the final quarter of 2018, Tesla delivered a record 90,700 vehicles. But the company’s total deliveries dropped to 63,000 cars during the first quarter of this year.

In an email to employees obtained by Business Insider, Musk appeared to hedge against concerns writing that the company has received 50,000 net orders for the second quarter thus far and that he’s confident Tesla can beat last year’s record.

The share prices in Tesla rebounded following confirmation of the authenticity of the note.

But investors aren’t so sure. “They have built a company and a cost structure based on enormous growth,” Whitney Tilson, the CEO and founder of Empire Financial Research, told Cheddar. “The problem is they sort-of met the initial demand for the early adopters.” He believes that Tesla will miss its expectation to produce 90,000 to 100,000 cars this quarter.

“The vast majority of Teslas are owned by wealthy, environmentally-conscious people who live on the coasts,” he added. “You don’t see very many Teslas out in Middle America. It’s just going to take more time for electric vehicles to really go mainstream.” Another major challenge for Tesla is that it’s inspired other automakers to produce competing electric vehicles, such as the Jaguar I-PACE and the Audi E-Tron.

Tesla’s challenges to keeping investors happy have been exacerbated by new findings from Consumer Reports, a consumer advocacy and product-testing non-profit. According to its report an optional feature within an upgrade to Tesla’s Navigate on Autopilot, a for-purchase add-on feature, created safety issues. The upgrade gave drivers the option to enable their cars to automatically change lanes without their confirmation.

“In our experience, very quickly we found that some of those lane changes weren’t frankly, very safe. Very often you wound up cutting off other vehicles. It would pass on the right. It could pass into a slow-vehicle lane,” Consumer Reports’ director of automobile testing, Jake Fisher, told Cheddar. “It’s very clear that the driver needs to pay attention, and be ready to take over at any time because Tesla realizes that this is not ready for prime time. However, the concern is that if you’re not ready to stop it from doing something dangerous right away, you can get into a dangerous situation.”

Tesla says that drivers have already driven millions of miles using this upgrade’s option. The company also says that it warns drivers that the feature does not make navigation autonomous, and that drivers must keep control of the vehicle and their hands at the wheel.

Still, Tilson says safety concerns have created endemic liability issues would make a major player like Apple wary of one day purchasing or merging with Tesla.

“Anyone with deep pockets is going to be very hesitant to buy a company like Tesla that’s got a lot of legal issues in overhang. Drivers have died using Autopilot. Whatever you think of the merits of the case, nobody with deep pockets is going to want to step into those kind of liabilities,” said Tilson. “The company’s not going to go away, but it may need to be restructured, and the equity holders could get wiped out.”