It seems like every few months Tesla TSLA is in the news for a scandal or some production issue. TSLA has also been a hot stock for young investors and people searching for massive growth potential from a firm in game-changing industry.
You can see in the chart below that this combination of investors, coupled with Tesla’s mixed history of big strikeouts and home runs and CEO Elon Musk’s eccentric management style, has created extreme volatility.
Tesla’s latest woes came not in the form of missed production targets, but from a lawsuit. Walmart WMT on Tuesday filed a scathing lawsuit against Tesla for alleged breach of contract, gross negligence, and failure to live up to industry standards for the production and installation of solar panels at many of Walmart’s stores.
Walmart claims that these poor-quality solar panels caused fires at seven of its stores. The retail giant claims that “Tesla routinely deployed individuals to inspect the solar systems who lacked basic solar training and knowledge.” WMT also alleges Tesla failed to ground its solar and electrical systems correctly and that some solar panels installed at Walmart stores had a high number of defects visible to the naked eye. Walmart claims Tesla inspectors should have identified and replaced these panels before they led to fires.
Walmart is seeking compensations for damages to buildings, inventory, and for evacuations. It is also wants Tesla to remove solar panels from the additional 240+ stores where they have been installed.
Alleged Backroom Dealings
In November 2016, Tesla acquired SolarCity in a $2.6 billion all-stock buyout. The infrastructure, patents, and personnel gained form this merger allowed Tesla to start its solar division. In the lawsuit, Walmart highlights familial ties between the two companies, calling it a flawed merger.
It alleges that this is the underpinning of the poor craftsmanship and service. “On information and belief, when Tesla purchased SolarCity to bail out the flailing company (whose executives included two of Tesla CEO Elon Musk’s first cousins), Tesla failed to correct SolarCity’s chaotic installation practices or to adopt adequate maintenance protocols, which would have been particularly important in light of the improper installation practices,” Walmart said in the lawsuit.
This is hardly good for Tesla’s image, as it looks like, based on the lawsuit’s claims, that its solar city acquisition might have been made to help family members, instead of actually expanding the company and benefitting shareholders.
Solar panels have not yet become a large part of Tesla’s business, as was expected at the time of the acquisition. During SolarCity’s heyday, Q4 2015, it installed over 200 megawatts of solar panels in a single quarter (enough to power about 130,000 homes). But last quarter, Tesla installed just 29 megawatts of solar, a huge decline from previous quarters. This could also show that the solar revolution Musk predicted is not yet here.
When Tesla acquired SolarCity, it showed off sleek solar panels that looked exactly like standard roof shingles to justify the expensive purchase. However, this technology is still not on the market, with only 12 homes installed as test cases. These solar roofs also cost around $100,000 for a house with a 2,250 sq. ft. roof. This means that this hypothetical house would have to save about $520 per month, much more than the average electricity bill, to make the solar roof a profitable investment against putting the money into a 30-year treasury bond.
This quarter (Q3), earnings are projected to fall 104.8% from the year-ago period to -$0.14, based on our current Zacks Consensus Estimates. However, analyst estimates for the quarter range from -$0.60 to $0.57, showing that Tesla is at least a little messy financially and earnings number are hard to predict.
For the full year, earnings are expected to drop 137.6% from 2018 to -$3.16. For fiscal 2020, earnings are then estimated to skyrocket to +$4.82 on the year, in a sign that it will hopefully start to recover from its history of large losses.
However, estimates tend to not mean much for Tesla as earnings surprises generally happen in huge magnitudes every quarter. The past two quarters saw negative surprises over 100%, while Q3 2018 saw a 627% positive surprise.
Our estimates call for revenue to shrink this quarter by about 3.2% over last year, but then come back up by 2.57% next quarter over Q4 a year ago. Full year revenue is predicted to jump 15.7% to $24.83 billion. In fiscal 2020, revenue is expected to keep rising another 23.86% to $30.75 billion.
Tesla currently holds a Zacks Rank #4 (Sell), due to earnings estimates for the current quarter and full year tanking in the past month. Tesla is estimated to have another rough year, but estimates show hope down the road.
This lawsuit is just the latest in a long line of Tesla’s financial, legal, and regulatory troubles and likely won’t have an immense impact on the bottom line. However, investors must start to question when, or if, the pot of gold will materialize at the end of Tesla’s rainbow.
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