Can you make money by investing in a company with no profits? A company that is burning through its cash? A company that keeps issuing new debt to cover its losses?
In Money Grab I wrote about Hawthorne Medical, a fictional start-up biotech company that was not making any money, was still in cash-burn stage, but whose stock price kept going up. The investment committee at Fairburn, Crandall disagreed on whether to buy the stock. Some thought it was a terrific opportunity. Others thought it was too risky.
Tesla (ticker TSLA), a manufacturer of electric cars, is a real-life example of a cash-burn company that is not making any profits and keeps increasing debt to fund its research and production efforts. For the six months ended 6/30/2017, Tesla’s operating loss was $498 million on revenues of $5.5 billion. The company recently announced it would issue an additional $1.8 billion in debt to fund its capital expenditure program.
And what has the stock done? The initial public offering (IPO) was on June 29, 2010 at $17. The company’s stock closed on August 22, 2017 at $341.35, an increase of 1,907.9%. Over the past five years, the stock has risen 1,057.12%. Over the past year, the stock was up 53.1%. In comparison, the S&P 500 was up 12.4% in the past year.
Is Tesla a good investment at this point? Many Wall Street analysts have the stock rated neutral or sell. Tesla is obviously not trading on financial fundamentals, but rather on its future potential. The company’s stated mission is to “accelerate the world’s transition to sustainable energy” and it plans to manufacture 500,000 vehicles by 2018. Investors have bought into the dream.
Is Tesla a terrific opportunity? Or is it much too risky to own? It’s a decision that many investors are struggling with, just as the investment team at Fairburn, Crandall struggled with whether to buy Hawthorne Medical. As long as Tesla’s revenues continue to grow and investors continue to believe in its future potential, the stock will defy traditional measures of financial analysis. At some point, the company will have to post profits to prove its viability. But for right now, the believers appear to outnumber the skeptics.