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Tesla: An Electrifying Month of News

“The fundamental message consumers should be taking today is that it’s financially insane to buy anything other than a Tesla. It’ll be like owning a horse in three years. I mean, fine if you want to own a horse, but you should go into it with that expectation.” —Elon Musk

“Tesla is not sustainably profitable or cash-flow positive, so this seems like putting a finger in the dike.” —Wall Street Analyst quoted in the New York Times, May 2nd 2019

We need to sell cars today in order to build the factory tomorrow.” —Elon Musk

It has been an electrifying few weeks of news flow from Tesla. The Company recently held its Autonomous Day event, reported earnings, and announced a multi-billion dollar financing. On the back of a very weak quarter, Tesla announced it will raise roughly $2 billion to fund operations and invest in the business. According to the New York Times, Tesla “plans to offer investors 2.72 million shares of stock, which would raise about $650 million, and $1.35 billion of debt securities that can convert to stock at a later date.”

It is a fascinating time of uncertainty in the automobile industry and nowhere is that more apparent than at Tesla. Tesla’s stock volatility is simply a reflection of the unknowns facing Tesla and the industry as a whole. Nobody can deny the fact that Elon Musk has transformed the automotive, space, and energy industries. Musk’s success is notable given the fact that many first mover revolutionary personalities or products often do not win in the long run—think Billy Durant at GM or the Betamax.

Tesla has continued to launch new products and add capacity. They are successfully disrupting the competitive landscape and incumbents like Ford and Mercedes are launching all-electric vehicles that will compete with Tesla. Musk’s aggressive product development and infrastructure buildout schedule require enormous amounts of capital. In July of 2016, the Company launched the Model X and one year later (after some fits and starts) Tesla began selling the less-expensive Model 3. They are also working on an electrified semi truck that seeks to revolutionize the road-based long-haul shipping industry. Tesla is now talking about adding a roadster, a pickup truck, and a crossover called the Model Y. On top of all this, the Company is in the process of building “Shanghai Giga,” a massive factory in China that will manufacture the Model 3 and the Model Y.

Tesla is at a critical inflection point. While the products its sells are immensely complex, the business model is rather elementary—Tesla simply needs robust car sales to fund its growth. Tesla must reach escape velocity soon if it is going to succeed. In the most recent quarter, Wall Street was expecting revenue of $5.779 billion for the quarter and a loss of $1.21 per share. Tesla announced $4.5 billion in revenue and a loss of $4.10 per share—a colossal miss in both revenue and earnings. The company attributed the massive miss to delays introducing the Model 3 in China and Europe. In the first quarter of 2019, Tesla built 77,100 vehicles—a number roughly 12% below last quarter. Total deliveries in the first quarter fell to 63,000 vehicles, about 30% below the fourth quarter record high of 90,700. In general, Wall Street analysts were expecting about 76,000 deliveries in the first quarter.

What does the future hold for Tesla? Based on Tesla’s most recent earnings report and projected cash needs, it’s not hard to imagine someone like Google’s Waymo ultimately owning all of Tesla’s assets.

The following video is from Tesla’s Autonomous Day. It’s a marathon three-hour video:

Reposted from the New York Times:

Tesla needs more money. A lot of it.

After a surprisingly weak first quarter, in which it burned through nearly $1 billion, the company said Thursday that it would seek to raise about $2 billion in the markets.

The electric-car maker plans to offer investors 2.72 million shares of stock, which would raise about $650 million, and $1.35 billion of debt securities that can convert to stock at a later date, according to a regulatory filing. The plan could raise as much as $2.3 billion if demand is great enough for the banks underwriting it to sell additional stock and bonds.

Wall Street analysts, noting Tesla’s haphazard progress, had long expected the company to return to the public markets for fresh capital.

“It was kind of inevitable,” said Vicki Bryan, chief executive of the research firm Bond Angle. “It was overdue.”

It’s the first time in two years that Tesla has turned to the equity markets for capital and its biggest issue of new shares since it raised $2.3 billion in 2016. After the company’s initial public offering in 2010, Tesla had sold shares or convertible securities every year through 2017, raising roughly $8 billion, according to data from Dealogic.

Selling new shares often depresses a company’s stock price, but Tesla’s stock ended the day up 4.3 percent, a sign that some investors still believe the company can achieve its ambitious goals, and are willing to finance those dreams.

“This is pretty important for Tesla,” said Ross Gerber, the chief executive of Gerber Kawasaki Wealth and Investment Management, who owns Tesla shares. “We’re very excited because they are able to raise the capital at a very low cost.” Tesla shares trade at a high valuation. As a result, the company is effectively paying little when it issues new shares.

Tesla said its chief executive, Elon Musk, would spend $10 million buying new shares.

Mr. Musk had said for months that Tesla did not need to raise new capital. Then, when discussing the company’s first-quarter results last week, he said there was “merit to the idea of raising capital at this point.”

But it probably would have made more financial sense when Tesla’s stock price was a lot higher. With the stock down by more than a third from its 2018 peak, Tesla must sell more shares to raise the same amount of money. When new stock is sold, existing shareholders end up with a smaller stake in the company if they do not take part in the new offering.

The plan to raise money also underscored Tesla’s reliance on the good graces of public-market investors. Mr. Musk indicated last year that he wanted to take Tesla private. Discussions with investors set off a series of events that led to Mr. Musk’s saying on Twitter he had secured funding to do just that. The Securities and Exchange Commission said his declaration was misleading, and Mr. Musk later reached a settlement with the regulator that forced him to step down as the company’s chairman.

A Tesla dealership on Berlin. Tesla is expecting sales of the Model 3, its lowest-priced offering, to pick up as it irons out logistical problems that it says have hampered deliveries in Europe and Asia.CreditSean Gallup/Getty Images

If Tesla raises $2 billion, it can use the money as a buffer in case its operations continue to stumble and consume large amounts of cash this year.

In recent months, Tesla has not sold enough cars to cover its operating expenses. Sales of its main product, the Model 3 sedan, tumbled in the first quarter. As a result, the company’s operations used $640 million in cash in the period. In addition, Tesla reported $280 million in capital spending.

The company also paid off a convertible bond in the quarter, using up $920 million of cash. At the end of March, Tesla had $2.2 billion in cash on hand, down from $3.7 billion at end of 2018.

Jeffrey Osborne, an analyst at Cowen & Company, said he expected Tesla’s operations to churn out $835 million in cash this year, but he also predicted that plant and equipment needs would use up $2.4 billion of cash.

Tesla is expecting Model 3 sales to pick up as it irons out logistical problems that it says have hampered deliveries in Europe and Asia.

It is not clear whether demand for the Model 3 is softening in the United States. Sales were particularly strong last year, but some of them may have been motivated by the reduction of an electric-car tax credit on Jan. 1. The credit will be reduced again on July 1 and will disappear after this year. And sales of Tesla’s older, more expensive models have recently plummeted, and these generally have fatter profit margins.

But sales are not the only thing that affects Tesla’s cash. The company has plans for new models that include a large truck, the Semi, and a sport utility vehicle, the Model Y. Tesla is also developing facilities in China. And it is thinking about selling its own insurance, which could also require significant amounts of capital.

Analysts think the plan announced Thursday will probably be adequate to finance the production of Tesla’s current models, but they say the company may be back for more cash as it moves to release new vehicles.

Because of production problems, Tesla products have in the past come out long after the company initially said they would. If such delays recur, Tesla’s cash will be depleted and its more efficient rivals will have more time to eat into its market share with their products.

For most of its existence, Tesla has failed to show consistent profits. During the past 10 years, it has posted a profit in only four quarters.

“Tesla is not sustainably profitable or cash-flow positive,” said Ms. Bryan, the analyst, “so this seems like putting a finger in the dike.

 

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3 Responses to Tesla: An Electrifying Month of News

  1. Doc Jewell May 7, 2019 at 5:59 pm #

    The company just seems to be mismanaged when not taking advantage of the equity market when the stock was higher. They could have received better terms in the bond market last year.

    The CEO has been videoed smoking pot in a blog. He admitted to doing Ambien during that time.

    I am not a buyer of the stock, the bonds.or the vehicles. I would not short it as it has many favorable opinions from big buyers.

    Phillip wrote the greatest summary of the situation in front in Telsa that I have ever read.

    Doc Jewell
    A Registered Financial Adviser with the SEC

  2. Michelle H Rand May 6, 2019 at 5:55 pm #

    Part of the problem is that Musk shoved SolarCity into the Tesla parent company, and that company has neverending losses too.

    “But it probably would have made more financial sense when Tesla’s stock price was a lot higher.” — This is a tail chasing dog proposition. First off, few companies ever raise money at the top, when they don’t need it. But most important, just the fact of announcing a raise will cause the share price to stumble.

  3. Doug Schellinger May 6, 2019 at 10:00 am #

    Musk is just the latest version of Preston Tucker.