Bob Lutz Has Advice for Tesla Stockholders

Not I but a former executive of General Motors thinks that Tesla Motors Inc (NASDAQ:TSLA) is a “lousy” business. The market, however, seems to disagree. Even after reporting another abysmal quarter, TSLA stock is riding high on Elon Musk’s optimistic outlook.

It wouldn’t be an exaggeration to say that Tesla enjoys brand recognition that no other automaker does. Part of it has to do with Tesla chief Elon Musk, who is worshipped for his charismatic personality.

This conjecture has indeed been proven true after yesterday’s earnings call. Despite posting bad numbers, the stock flew high for one reason alone—Elon Musk delivered an optimistic future guidance with a promise to turn cash-flow-positive by next month. And the market believes his words more than the numbers.

Not everybody is impressed, though. The former executive of General Motors Company (NYSE:GM), known as the “Father of the Chevy Volt” for his commitment to this fuel-efficient car, says Tesla’s business model is upside down:




“Their costs have always been higher than their revenue,” said Bob Lutz, speaking in an interview on CNBC’s Squawk Box. “They always have to get more capital. Then they burn through it.” (Source: “Tesla’s business model ‘upside down’: Bob Lutz,” CNBC, February 4, 2016.)

It is interesting to note that the former GM executive likes Tesla’s cars, but he doesn’t like its business model.

Bob Lutz gives two reasons for his argument as to why Tesla will continue to struggle with negative bottom-line numbers. The first is slowing demand for electric vehicles (EVs) on the back of falling oil prices. The second is growing competition that will cut into Tesla’s margins as prices for EVs fall.

Lutz says that “While the [Tesla] car is excellent, the business has always been lousy. Now, it’s super lousy because the generic demand for electric vehicles is down.” (Source: Ibid.)

Lutz believes that competition from industry heavyweights could “kill” Tesla in the coming days.

“The major OEMs like GM, Ford, Toyota, Volkswagen, etc…they have to build electric cars, a certain number, in order to satisfy the requirements in about half of the states. Those have to be jammed into the marketplace, otherwise they can no longer sell SUVs and full-size pickups and the stuff that they really make money on. So that is going to generically depress the prices of electric vehicles,” warns Lutz. (Source: Ibid.)

The ex-GM executive doesn’t stop there. He goes on to reveal that General Motors will not be making any money on its “Tesla killer.” Lutz says that the $30,000 Chevy Bolt is no more profitable than Tesla cars. This is because the cost of producing the Bolt is much higher than what it is selling for. Lutz warns that Tesla will have to face the same challenge with its cheaper “Model 3.”

“The majors are going to accept the losses on the electric vehicles as a necessary cost of doing business in order to sell the big gasoline stuff that people really want. Well, Tesla does not have that option,” notes Lutz. (Source: Ibid.)

Lutz concludes with an investment advice for holders of TSLA stock:

“If I owned Tesla stock right now, I just couldn’t wait to sell before the bottom falls out.” (Source: Ibid.)