While contrarianism has its time and place, some market ideas don’t show enough to move against broader public consensus. A case in point might be TuSimple (NASDAQ: TSP). Specializing in autonomous truck driving technologies, TuSimple ties into multiple relevancies on paper. Unfortunately, a boatload of controversies plus a significant layoff announcement cloud the narrative. Thus, I am bearish on TSP stock.
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Several days ago, The Wall Street Journal broke the news that the autonomous driving systems provider potentially planned to cut at least 50% of its workforce. Nominally, this would have impacted about 700 employees. The development followed a chaotic series of events for TuSimple, which incurred multiple federal investigations and the removal of its CEO in October of this year.
While the layoff announcement itself caused TSP stock to pop higher on the cost-savings implications, its value quickly plummeted. In the trailing five days ending at the close of the Dec. 21 session, shares gave up nearly 16% of equity value. Even worse, on a year-to-date basis, TSP hemorrhaged over 96%. Whatever the company needs to do, it must do it quickly.
To be fair, hedge funds continued to bid up TSP stock going into the third quarter of this year. However, with the latest batch of wildly negative news, these institutional investors will likely abandon ship. If that were to be the case, retail investors surely don’t need to stick around.
TSP Stock Faces an Uncertain Future
On Wednesday, TechCrunch.com revealed the details of TuSimple’s headcount reduction. Though it wasn’t the halving that the WSJ mentioned, at a 25% elimination, the axing was nevertheless steep. With the company currently occupied with selling off its Asia business, the pink slips will only affect U.S.-based staff. While it’s not yet clear which business units will suffer the most cuts or whether specific regions will face the axe, the headcount reduction will likely impose significant long-term headwinds against TSP stock.
True, layoffs tend to bolster equity valuations in the short run as they demonstrate commitments to shareholders. However, the benefits might not be sustainable. According to research by the Wharton School of the University of Pennsylvania, headcount reductions disrupt morale. Over time, the cuts can negatively impact the synergies needed for enterprises to achieve success. Further, it’s quite possible that aspirational tech firms like TuSimple may suffer more damage than usual.
As the WSJ noted, TuSimple doesn’t build the trucks themselves. Rather, they provide autonomous driving systems that integrate into existing vehicles. Thus, it’s really the underlying innovation that bolsters TSP stock. That being the case, cutting engineers would ultimately cause the company to go backward.
Scandals Cloud TuSimple’s Narrative
Another headwind that’s already blasted TSP stock is the series of controversies that clouded the underlying business narrative. From potentially illicit insider dealings to a federal safety investigation, TuSimple hasn’t kept its nose clean. Down the line, this can also negatively affect its valuation.
As stated earlier, TuSimple removed former CEO Xiaodi Hou in October. Following an inquiry by the company’s board of directors, it concluded that Hou and other employees provided confidential information to Hydron Inc., a trucking startup with operations mostly in China.
In turn, the ousted executive teamed up with fellow TuSimple co-founder Mo Chen (who leads Hydron) to fire the board. In November, accounting firm KPMG stated in a letter to the U.S. Securities and Exchange Commission that it resigned as TuSimple’s auditor because of the board firing.
Not surprisingly, the autonomous tech specialist faces multiple federal investigations regarding its close ties with Hydron. If that wasn’t bad enough, TuSimple faces a separate federal safety investigation related to a crash involving its autonomous driving system.
Although TuSimple blames human error due to erroneous inputs, analysts suggest the autonomous system itself caused the accident. If the latter happens to be the case, TSP stock would likely incur catastrophic losses. After all, if the platform itself doesn’t work, TuSimple doesn’t have anything to fall back on.
Is TSP Stock a Buy?
Turning to Wall Street, TSP stock has a Moderate Sell consensus rating based on zero Buys, five Holds, and four Sells assigned in the past three months. The average TSP price target is $4.30, implying 186.67% upside potential.
The Financials Tell the Rest of the Tale
Lost in the whole mess is the financial picture. Essentially, forward-looking aspirations (that may never materialize) undergird TSP stock rather than hard numbers. With recession fears rising, investors will likely prioritize companies that are getting it done rather than those that might.
For instance, with TuSimple featuring a trailing 12-month revenue tally of only $8.69 million, it will be a tall order for anyone to have confidence in TSP stock. Not only that, the meager sales come atop a net loss (on a TTM basis) of $451.5 million. On the retained earnings line, the company shows a current loss of $1.36 billion.
In fairness, some balance sheet stats ring positively, such as a cash-to-debt ratio of 22.6 times. However, with an Altman Z-Score of 0.48, the business is deeply distressed. Therefore, anyone not a gambler should stay away from TSP stock.
