Tesla Reports The Usual Losses
Tesla reported a relatively normal quarter for the company. It’s used to reporting major losses as it ramps up its production of the Model 3. The goal is to get to 5,000 cars produced per week. The firm lost $3.35 in EPS which actually beat estimates by 6.5 cents. The beat came because of the $50 million gain from zero emission vehicle credit sales. The scary part of the results is that the firm burned $1.05 billion in cash. There was a $702 million decline in the firm’s cash balance to $2.67 billion. There was a $1.05 billion increase in net debt; net working capital was negative $3.05 billion. My big disconnect with the company has always been trying to understand how the firm will be more profitable by selling a lower priced car. That would be like if Apple lost money selling the iPhone X and tried to make money selling the iPhone SE.
Tesla Needs Elon Musk
The investment thesis has always revolved around Elon Musk who is the best as selling ‘cool.’ It’s extremely valuable to be able to sell cool products. He’s the best marketer of our time. Some investors believe Steve Jobs’ primary differentiating point as CEO of Apple was marketing. However, Steve actually delivered on the products he promised. Elon Musk repeatedly has missed estimates and forecasts. He is running Tesla like an expansive Kickstarter campaign. Eventually people putting money into a Kickstarter campaign will want the product promised. It would be great if Elon could only be in charge of marketing, but unfortunately the marketing would ring hollow without him running the company.
Elon Blows Up On Conference Call
Despite Elon Musk not executing on his vision in a timely fashion or in a close to profitable one, he is the only asset the company has to keep it afloat. This is where the problem lies because his eccentric actions are growing problematic. His joke on Twitter that Tesla was going bankrupt on April fools was nothing compared to how he performed on this quarter’s conference call. He was challenged by an analyst because the company pushed back its goal of achieving 25% gross margins by about 6-9 months to the middle of 2019. Elon scoffed at this difference saying 3-6 months wasn’t a big deal. That started his erratic behavior.
He then cut off a question about the firm’s capex guidance. The firm reduced its expected capex spending from $3.4 billion to less than $3 billion in 2018 despite the expected spending ramp on Model 3 and Model Y. He stated this question wasn’t cool. That sounds like the behavior of a teenager who doesn’t want to answer a tough question. Firms usually are able to steer clear of questions they don’t want to answer in a more professional way.
It’s important to have a positive rapport with the analyst community. This was a reasonable question. It triggered Elon because the company is getting close to needing to raise money even though he denies wanting or needing to do so. The firm’s capex guidance implies it will burn $2.3 billion in the rest of the year. If the firm generates $980 million in free cash flow, this implies the firm will have only $1.3 billion in cash by the end of the year. This is putting big pressure on Elon’s claim that the company will be GAAP profitable by Q3 and Q4 of this year.
He mentioned a company isn’t really a company until it’s profitable. I agree, but it’s tough to see how Elon Musk will deliver on this promise. It sounds like he’ll scoff at this projection in 6 months just like how he’s now scoffing at his previous gross margin projection from last quarter. He’s running out of cards to play. He stated the company will be reorganized to get rid of barnacles. There needs to be a lot of barnacles removed to get the company in the black in a sustainable fashion.
The worst part of the call was after an analyst asked a question about how many Model 3 reservations were cancelled, the call was cut off for a few seconds. Then Elon Musk came on and said he didn’t want anymore boring questions. The was handled very badly. It’s fine to not share that number. Personally, I think it is important because it shows how sustainable the Model 3 demand is. However, I understand the firm not wanting to share the information for competitive reasons. The scary part is this was handled like an ‘emperor has no clothes’ moment. There seemed to be shock at the thought of anyone asking a tough question. If I never looked at Tesla’s balance sheet or knew about the problems with meeting production goals, I would’ve been worried about the firm. The fact that we know Tesla is in weak shape, makes it look like the management team running the house of cards are getting nervous.
Elon Musk, who was distraught at the idea of a tough question, immediately went to a YouTube question which was from retail investors. He allowed a 25 year old who was representing retail investors to ask a few questions as a respite from the tough questions from analysts. There’s nothing wrong with letting retail investors get involved, but they serve little value to investors if they are just fluff questions which they were.
Conclusion
Tesla’s stock was up slightly after the results were released, but the stock dropped sharply during the call because of Elon’s terrible performance. It ended the after hours session down 4.55%. The hope for the company is it puts this bad performance behind it, finally meets production goals, and gets closer to profitability. This will help it raise money for the Model Y production ramp. For Tesla, it’s all about surviving another quarter to invest in new products. It’s tough to find a long term bullish thesis for this firm. The only goods news is there is a lot of hype around its new product launches. Unfortunately, that hasn’t ever translated into profitable sales.
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