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Fallen Angels

In the recent steep decline of the stock market, many high fliers got hit the worst. Here’s an analysis of three and if now is a good time to invest in them.

 

Tesla

Tesla is attempting to be the first successful US automotive company since Chrysler’s founding in 1925. Tesla’s differentiation is that they are at the forefront of electric car innovation and are selling direct without dealers. They have a very loyal following and are targeting the high-end where all the money is made. However, this all takes a huge upfront investment that has not yet paid out. To date Tesla has raised nearly $5 billion and spent the bulk of that. They continue to bleed cash and post large losses with a stock price declining from $286 last year to under $160 now. Bob Lutz, a former executive at Ford and GM, believes they are doomed as they will not be able to finance the huge investment needed to sell cars without dealers, build-out charging stations across the country, and complete the $5 billion “giga” factory to make their own batteries.
So why should you consider this stock now?
Tesla is a game changer and it takes huge amounts of capital to win. Witness Amazon that invested tens of billions and finally enjoyed a 122% return last year. Jeff Bezos ignored the naysayers and now has the 6th most valuable company in the world. I believe Tesla will be the 800-pound gorilla over the next 20 years. Elon Musk is a patient visionary believing that technological advances, much of it software, will change how we think about cars. While others are coming out with electric cars, I believe this race has already been won since Tesla has the best designers and no one is even close to where Tesla is today. Plus, I believe Americans would prefer to buy American cars, everything being equal (which hasn’t been the case for decades).
While Tesla may still trade lower over the next year, this is one to watch and consider as a long-term investment.

 
Twitter
Popular with social media users, Twitter has struggled to gain advertising revenue similar to Facebook and Google, largely due to its limited 140 character “tweet” format. Unlike these companies, it posts massive losses and burns cash. It went public in 2013, quickly hit $80, traded as high as $53 in 2015, but now trades around $15. Twitter’s CEO is Jack Dorsey who is also the CEO of Square, another technology company losing lots of money. His management skills have been questioned and Twitter recently experienced an exodus of executives.
My analysis is that Twitter will continue to be challenged with high costs and slow growth in advertising revenue. Mr. Dorsey has shown to be incapable of running one yet alone two public companies. Enjoy using the product but stay away from the stock until they figure out a viable business model and hire a CEO interested in running one profitable company.

 
GoPro

GoPro is famous for inventing rugged compact cameras used by adventure seekers. The cameras enjoyed immediate success and the stock hit a high of $87, last year traded as high as $65 but now is under $10 after posting disappointing growth. To bolster demand, the company slashed prices and went into a deep cost cutting mode. Competitors are looming and the “cool factor” may have waned.

GoPro’s current valuation is compelling and in my opinion worth a look. They are profitable and do still own the segment. They have ample cash on hand, no debt and should be able to weather the storm.
With any investment decision I encourage you to discuss this with your investment advisor and CPA to see if this is suitable for you. Of the above, I recently bought GoPro and am looking pretty hard at Tesla with its new low price.

 

Ray Link is a CPA and holds an MBA from the Wharton School. He recently retired from FEI Company (NASDAQ: FEIC) where he was the CFO for 10 years. He is on the on the Board of Directors of Cascade Microtech (NASDAQ: CSCD), Electro Scientific Industries (NASDAQ: ESIO) and nLight Photonics.

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