Tesla (NASDAQ:TSLA) stock is in the headlines seemingly every week for one reason or another. The latest head-scratcher is the company's decision to once again offer free unlimited supercharging for its Model S and Model X buyers.
This isn't the first time free supercharging has been on offer, so maybe it shouldn't raise eyebrows. However, reading between the lines of the decision is what's so unsettling for investors of TSLA stock.
The first question investors must ask themselves is what is behind the decision to return to free supercharging for life. Tesla phased out free charging just last year. At the time, CEO Elon Musk explained the decision to disappointed customers on Twitter (NYSE:TWTR).
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"Really need to bring this program to an end while being as fair as possible. It's not sustainable long-term," Musk wrote.
In other words, it's too expensive for Tesla to power customers' cars for life. One of Tesla's biggest problems is how unprofitable the company is. Tesla stock tanked 10% following second-quarter earnings because the company reported a $408 million net loss. It was nearly three times the loss Wall Street analysts were anticipating on a per-share basis.
Tesla has desperately been cutting costs and laying off employees in an effort to prove to the world it can be consistently profitable on a large scale. But its latest decision to return to its "unsustainable" free charging model confounds onlookers.
Tesla Is Desperate for Demand
The only logical explanation for the 180-degree turn on free charging is that Tesla is desperate to sell Model X and Model S vehicles. As bears have argued for months, the low-margin Model 3 is eating into demand for these more profitable models.
Model S registrations were down 54% in California during Q2, according to Dominion Cross-Sell. Model X sales were down 40%. California is by far Tesla's largest market, accounting for 40% of total Model S sales in 2018.
At the same time, Model 3 registrations in that state doubled last quarter. On the surface, it's good news for TSLA stock. However, if the low-margin Model 3 is simply cannibalizing sales of the higher-margin models, Tesla is just shooting itself in the foot.
Assuming Tesla takes the offer of free lifetime supercharging away again at some point, it's also pulling future sales forward. Along with the disappearing EV tax credits, free supercharging may be helping to create a future demand vacuum for Model S and Model X vehicles.
TSLA Stock Running Out of Growth
Stanphyl Capital hedge fund manager and Tesla stock bear Mark Spiegel says TSLA has become a growth stock that is running out of growth.
"Demand for its existing models is only being maintained via continual price reductions, and it will have to raise billions of dollars to produce new models in a market soon to be saturated with enormous competition," Spiegel says.
To combat that deteriorating growth, investors should expect Musk to continue to pull out all the stops to beef up sales numbers any way he can. Musk will also likely continue to dismiss critics and make big promises to attempt to distract from Tesla's poor performance. Musk will talk about autonomous vehicle technology, electric planes, and neural lace.
Also, he will tell investors that Tesla will be profitable in Q3 and it will never again need to raise capital. He will predict a million Tesla robotaxis on the roads in 2020.
When it comes to Musk's track record of promises, Spiegel has some succinct advice for investors.
"Elon Musk is extremely untrustworthy," he says.
Tesla bulls can talk about how much of a genius Elon Musk is. They can talk about how great Tesla vehicles are until they're blue in the face. But until something changes, TSLA stock needs sales growth and/or profitability to get any type of positive momentum going.
However, a return to free charging for life suggests the current plan is to sacrifice profits for sales. That strategy didn't seem to work out in Q2. I don't expect it will work out well in Q3 either.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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