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Crisis looms: Falling demand, high costs bring Tesla to a crossroads

There has been growing apprehension among the stakeholders of Tesla (Nasdaq: TSLA) about its future, despite Elon Musk repeatedly promising to resolve the operational and financial issues and bring the company back on track. Now, it seems the worst nightmare of the often unpredictable CEO is coming true.

Analysts continue to be cautious in their outlook about the company, and the sentiment hit the bottom this week after a leading brokerage warned that Tesla is facing a ‘Code-Red Situation’ that needs immediate attention. Brokerage Wedbush also lowered the target price on the stock to $230 from $275. The market was a bit too harsh in its reaction this time and the stock slipped below the $200-mark for the first time in nearly two-and-half years on Monday.

The recent ups and downs of Tesla were mostly linked to its flagship product – the Model 3 sedan. Though the highly popular electric car has had many successors, it is estimated that Tesla’s future will largely depend on the demand for Model 3 and the company’s ability to meet the delivery targets. Latest statistics show that the crisis facing Model 3, in terms of demand, is far from over, which points to muted sales throughout 2019. As a result, profitability will continue to evade the company for the rest of the year.

The sentiment hit the bottom this week after analysts warned that Tesla is facing a ‘Code-Red Situation’ that needs attention

Shares of Tesla have declined steadily for more than six months now, losing an alarming 41% during that period. After opening Monday’s session just above $200 on the Nasdaq stock exchange, they dropped to around $196 soon after trading started. The simmering tension over last week’s fatal crash involving a Tesla car, allegedly caused by its faulty autopilot system, was exacerbated by Musk’s latest remarks suggesting that the company needs a “hardcore” review of its expenses.

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Related: Tesla Q4 2018 Earnings Conference Call Transcript

After a few hits and misses of the Model 3 production deadlines during the second half of last year, the company at one point gave the impression that deliveries were improving and would meet the schedules this year. But, the general perception is that deliveries will be well short of the company’s full-year target of 360,000 to 400,000.

Musk’s caution over expenditure is based on the fact that the conditions that dragged the company into a wider-than-expected loss in the first quarter still exists. Like in the March-quarter, a substantial payoff related to convertible bonds will be due in the to-be-reported quarter.  The need for additional capital, especially if the current situation prevails, will add to Tesla’s liabilities while also putting extra pressure on liquidity.

For the first quarter, Tesla reported a net loss of $2.90 per share, hurt by a marked increase in costs and expenses, despite a 33% surge in revenues to $4.54 billion.

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