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Should You Sell Tesla (TSLA) Stock At Its 52-Week Low?

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Shares of Tesla (TSLA - Free Report) sunk over 2.5% on Thursday morning as part a nearly month-long slide that has seen the electric car maker plummet to a new 52-week low as investor worries continue to pile up.

It’s been over a week since Tesla approved CEO Elon Musk’s massive, relatively unprecedented compensation package. Then, last Friday, a Tesla vehicle was involved in a fatal crash that sparked new worries about its semi-autonomous autopilot system.

Earlier this week, Moody's downgraded Tesla's credit ratings to “negative” from “stable,” pointing directly to Tesla’s Model 3 production woes and worsening financial picture as major points of concern. This fresh financial worry helped amplify Tesla’s current bond issues.

Tesla has to raise more cash to cover $1.2 billion of debt that comes due by 2019, which might be harder considering that yields on some of its other bonds just hit new highs.

As of Wednesday, Tesla’s 2025 bonds were yielding roughly 7.7%, while the notes sunk to a low of 86 cents on the dollar. These recent debt issues undoubtedly concern Tesla and its shareholders, for obvious reasons.

 

Current Fundamentals

Tesla also needs the cash in order to improve production issues it has faced for years. However, Tesla could face a harder time grabbing another large influx of cash as its credit rating becomes a bigger issue. And when Tesla does issue new bonds, they might not come at the previously favorable rates.

Taking on new debt would also be far less of a concern if Tesla had proven able to translate new cash into real outputs. 

Tesla reaffirmed its plans to produce 5,000 Model 3s per week by the end of the second quarter of 2018 on its fourth-quarter earnings call, but investors have begun to get wise to Tesla and Musk’s tactic of overpromising and under delivering on practically everything—especially production goals for its mass-market Model 3 vehicles.

Tesla sold a total of just 102,807 cars last year, and the more expensive Model S sedan and Model X SUV made up a large portion of sales. Meanwhile, the likes of Ford (F - Free Report) , General Motors (GM - Free Report) , Toyota (TM - Free Report) , Volkswagen , and many other proven automakers have jumped into the electric vehicle industry.

Worse still, our current Zacks Consensus Estimates are calling for Tesla to post an adjusted loss of $7 per share in its current fiscal year, even as revenues are projected to climb by 60%. This underscores an issue that investors had previously been content to sweep under the rug: Tesla’s current business and production model is remarkably unprofitable—at least in the near-term.

Bottom Line

Tesla might be able to work through its current production problems and eventually be ready to take on industry giants. But if the company keeps burning cash at its current rate, with little to show for, new debt holders and investors might be harder to come by.

Tesla is currently a Zacks Rank #4 (Sell) and is trading at an off-the-chart earnings multiple, which is based on the idea that the company will be a transformative force down the road. However, it seems like Tesla might have a harder time revolutionizing the auto industry if it doesn’t start selling a lot more vehicles soon. 

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