More Tesla Troubles

I’ve reported on the problems of Tesla Motors before. Elon Musk’s California-based electric car company has a slavishly-devoted fanbase quick to attack critics, but thus far Tesla has produced more hype than profits. “The more cars it sells the more cash it burns.”

Now Coyote Blog has offered an extensive roundup of just how dire the economic straits that Tesla is in are:

  • The first quarter of 2019 was a disaster, with deliveries down despite initiation of Model 3 sales in Europe. Worse, since the Model 3 seems to be cannibalizing Model S and X sales, Tesla was not only selling fewer cars but its mix shifted to lower priced less profitable cars. It lost an enormous amount of money, and only after the conference call with analysts about first quarter results did Tesla reveal that this loss would have been far worse without a huge sale of government EV credits
  • Tesla burned a staggering amount of cash in the first quarter, and was forced to pay off nearly a billion dollars in debt when the stock price did not remain high enough for the debt to convert. While Tesla’s cash balance at the end of the quarter looked OK, there were two huge red flags. First, the cash barely covered a huge hole Tesla had in its net working capital. Second, given the large number of vehicles Tesla sold in its end of quarter push in the last 2 weeks of the quarter, it appears that Tesla was nearly out of cash in Mid-March and perhaps days away from a default (analysis below).
  • The Tesla financial statements still include a number of unexplained oddities, including a billion dollars of accounts receivable, or about 20% of quarterly revenues. How does a company that demands payment in advance before delivery have 20% of its quarterly revenues tied up in receivables?
  • Tesla announced, out of the blue, that it was closing all its retail stores and going online only. Given the drop in demand for the quarter, it was a head-scratcher as to why eliminating the sales force was going to help. The decision seemed to be almost off the cuff, as Tesla seemed surprised that they would still have to continue paying their expensive long-term mall leases. After this was revealed, Tesla partially reversed the closure decision, but no one — including their own retail folks — seems to know what the plan is now.
  • Tesla constantly fiddled with its prices and model lineup. It cut prices several times, but also announced a small raise as well. It eliminated certain options for cars, added new ones, and then reintroduced eliminated ones. Even long-time Tesla watchers are confused about the model lineup today.
    Tesla continued to see an outflow of executive talent, including the exit of their very well-respected new General Counsel after just over one month on the job (Mr. Buttswinkas returned to his old law firm and purged Tesla from his resume). This seemed to parallel the rapid exit of an outside chief accounting officer last year who gave up millions of dollars to exit in just 60 days.

  • April car deliveries stayed on the same pace as the first quarter — ie, way worse than Tesla’s guidance
  • Elon Musk continued to get in trouble with the SEC, firing off production and sales guidance on Twitter that was different from Tesla’s official published guidance. Mr. Musk and Tesla are still guiding to a total delivery number for the next year that is well in excess of what most anyone else looking at the first four months believes is possible
  • Tesla announced a reveal of their Model Y crossover that will not go on sale until at least the end of 2020. Unlike past Tesla reveals, this one seemed hastily set up and the prototypes shown were weird. They looked more like the existing Model 3 with a few modifications than a promised crossover that could incorporate a third row of seats. Tesla asked customers to start making deposits (skeptics will argue that the whole point of the reveal was just to get some free financing from Tesla fanboys) but unlike past reveals, this one fell flat. There was apparently little interest in making deposits, though Tesla (unlike with past products) has not revealed the deposit numbers.

On top of all this, it announced out of the blue that it’s going to be make itself into an “autonomous taxi company”:

Musk has a demonstrated pattern that whenever he needs the stock price to be higher, or he needs to sell stock, or he needs some other kind of favorable financial outcome, he will do a new product demo. It worked for battery swap and the solar shingle and the model 3 and the semi, so it would work again. The model 3 reveal had collected hundreds of millions of dollars of cash in the form of deposits. That’s what he needed now. The problem is, they didn’t have a prototype to show. I believe Musk had the company hastily create a Model Y prototype built on top of a model 3. It did not really have to work, it just had to be something he could talk about. Interestingly, his VP of engineering quit at exactly this time, for reasons unknown — was their some internal dissention about this Y prototype?

Anyway, the Model Y reveal was essentially a flop, and likely garnered few deposits. Certainly not enough to fill in Tesla’s growing cash hole. And by Mid-March, Tesla may have been almost out of cash. Tesla says it delivered half its vehicles for the quarter in the last 10 days of March, so about 31,500 were delivered in those hectic days. At an average price of $50,000 each that would mean Tesla brought in nearly $1.6 billion in cash those last 10 days (this is conservative, may have been more if the average price was higher). But they only had $2.2 billion at the end of the quarter, meaning Tesla was scraping bottom in mid-March, particularly since hundreds of millions of that cash is restricted and not supposed to be spent.

Somewhere in this period of March-April, after his usual product reveal trick with the Y did not work, I think Musk came to the conclusion that the Tesla car business as currently defined was not going to work. Or, more accurately, it was never going to make enough money to support its sky-high stock valuation. I have always said that Tesla would make a fine $10 billion niche car company, but nothing about it justifies a $50 or $60 billion valuation. But at this point Musk can’t accept a $10 billion company, even though that would ostensibly still leave him a very rich man. But like Ken Lay at Enron, Musk has borrowed against at least half his Tesla stock and a falling stock price could lead to financial death by margin call (Musk, for some reason, also mortgaged all his multi-million dollar homes last December). His other investments are also struggling — SpaceX has been unable to attract the capital it needs of late and Musk has poured a lot of money into the Boring company, an absolute embarrassment of a company that helps refute, in my mind, his “smartest guy in the world” rep.

As Musk looked around for a way to save the stock valuation, the Lyft and Uber IPO’s must have had an influence. Uber is losing as much money as Tesla and folks are talking about it IPO-ing at a market cap of $70 billion. What if Tesla could call itself a ride-sharing company, only better. Wouldn’t that garner Tesla an even higher valuation?

Having not read The Smartest Guys in the Room, I am at something of a disadvantage when it comes to the collapse of Enron, but it seems to me that Enron was a profitable venture before wild over-expansion, shady regulatory arbitrage and outright accounting fraud brought it to bankruptcy. By contrast, Q4 2018 was the first time Telsa ever posted back-to-back profitable quarters.

Tesla could be a profitable company if it concentrated on manufacturing luxury cars and selling them through a traditional dealer network, just like Mercedes and BMW do today. Instead, Musk continues to chase the Next Big Thing in order to keep the overinflated stock prices high. (And it wouldn’t hurt if they did their manufacturing in a state with much saner cost, tax and regulatory structures than California.)

As the author notes: “This is the company that is going to spawn a thousand business school case studies.”

(Hat tip: Borepatch.)

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