SEC Criticism of Tesla Motors Is Another Reason to Shun the Stock

Shares of electric carmaker Tesla Motors  (TSLA) have fallen this week after The Wall Street Journal reported that the Securities and Exchange Commission criticized the company for using prohibited accounting practices.

The SEC denounced Tesla Motors for "tailoring" particular measurements in its second-quarter earnings report, which it released in August, according to recently released correspondence between Elon Musk's company and the commission.

Tesla Motors implemented an accounting trick that made the company appear to have registered more profits than it actually had for the quarter, according to the SEC.

This isn't a good time to invest in Tesla Motors. The company's shares fell slightly in Wednesday trading. 

This is particularly important, because the company's second-quarter performance was lauded as a turnaround point. It was only the second profitable quarter in the company's history.

Although a good portion of the profits that Tesla Motors hauled in during the quarter came courtesy of the company's sale of millions of dollars' worth of transferable tax credits -- most notably to MGM Resorts -- if its revised non-generally accepted accounting principles numbers show a significant drop in this metric, that could hurt investor confidence. Already, Tesla has been on shaky ground with investors over its acquisition of SolarCity. The concerns are threefold:

  • Tesla CEO Musk serves as chair of SolarCity and the major shareholder for both companies, raising conflict of interest issues.
  • Neither company has proven itself capable of steadily earning profits.
  • Tesla is already cash-strapped.
  • The purchase of SolarCity, though it makes sense in theory, could be a cash drain for the electric carmaker.

Tesla has always been a risky investment, and its future looks particularly challenging following the election of Donald Trump. Trump has been an outspoken supporter of fossil fuels and is not likely to look favorably on the electric vehicle industry. Trump has already vowed to repel the Clean Power Plan, which set a goal of 32% reduction in power-plant carbon emissions over 25 years.

Nor are Trump's administration and a Republican-controlled Congress likely to renew the generous Obama-era tax credits and benefits that Tesla customers receive -- let alone propose new ones.

The subsidy that electric-car purchasers receive is scheduled to decrease by 50% once a carmaker makes 200,000 electric-vehicle sales in the country. It is more than likely that Tesla will reach that number within the next year.

In addition, don't expect solar power to find a receptive audience as long as Republicans control the Federal government. Currently, customers who purchase solar panels receive a 30% federal tax credit But that's scheduled to decrease to 26% of the sale price in 2020, with further drops in the following years. That may be as good as it gets, and any new solar initiatives are unlikely. 

Not only does all this bode ill for SolarCity and Tesla Motors, but it also threatens other alternative-energy stocks, including First Solar and electric-energy juggernaut Exelon.

Year to date, Tesla's stock is down by more than 21%. Now is definitely not the time to jump into this risky play.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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