Streetwise Professor

February 26, 2017

If You Want Blood, You Got It–Tesla Redux

Filed under: Climate Change,Economics — The Professor @ 3:24 pm

When Musk announced his plans to merge Tesla and Solar City, I remarked that “Tesla bleeds cash like a Game of Thrones battle scene.” Elon (who long ago blocked me on Twitter, BTW) apparently recognized this. In an August 29, 2016 email to Tesla employees Musk emphasized how important it was for the company to report a positive cash flow for 3Q16:

I thought it was important to write you a note directly to let you know how critical this quarter is. The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production. Once we get to Q4, Model 3 capital expenditures force us into a negative position until Model 3 reaches full production. That won’t be until late next year.

. . . .

Even more important, we will need to raise additional cash in Q4 to complete the Model 3 vehicle factory and the Gigafactory. The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not “Tesla Loses Money Again”, but rather “Tesla Defies All Expectations and Achieves Profitability”. That would be amazing!

Were you amazed(!) that Tesla eked out a positive cash flow in the third quarter? If so, do you feel like a fool now that the 4Q16 results are out, showing that the blood is gushing again? For in the quarter, Tesla set a record (and not the good kind!) for free cash flow: a cool $1 billion to the negative, -$447 in operating cash flow and $522 in capex. The operating number reflected lower vehicle emissions credits, illustrating the company’s dependence on this source of revenue.

So what?, you say. Elon said that “Once we get to Q4, Model 3 capital expenditures” will make results look bad. But it appears that Telsa actually held back on capex. In the vaunted 3Q guidance, the company implied that it would spend $1 billion in capex in 4Q16: it barely spent half of that. This does not bode well for delivering the Model 3 on time, and demonstrates the dilemma that Musk faces.

Given Musk’s emphasis on delivering a positive cash flow number in the third quarter, it appears that his accountants rose to the task. There raises serious questions about the legitimacy of the third quarter number. It was obviously a one-off. Elon said that it was vital to “convince potential investors to bet on us” by “defying expectations.”  Was it necessary to lie to defy?

Any such suspicions should be strengthened by the, well, suspicious resignation of Tesla’s CFO on the day its 8-K was filed, to be effective when its 10-K is filed.  The reason given is rather odd: Wheeler plans to “pursue opportunities in public policy.” Well, I guess it’s better than “I want to spend more time with my family.”

The resignation of a CFO is never a good sign, especially when it coincides with the release of an ugly earnings report that follows an earnings report that appeared to be too good to be true at the time–and which looks even more too good to be true in retrospect.

Even Elon appears a little anxious. He said that the company’s cash position is “very close to the edge.” So get ready to have your stock watered again, boys and girls: “So we’re considering a number of options but I think it probably makes sense to raise capital to reduce risk.”

Or, to mix metaphors: another transfusion for the bleeder. In the vein, out the artery. Investors and Wall Street have been very forgiving. For years. How long can that continue?

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  1. I’ve been waiting for days for you to write this, as soon as the news broke. I saw a chart on Bloomberg with Tesla’s last 2 years by quarter. This 4Q was very ugly. Worse he danced around questions about hitting production numbers. It looks obvious that Tesla will not meet any of their targets. I fail to understand how so many investors can still throw money at Tesla.

    Comment by Dan — February 26, 2017 @ 9:54 pm

  2. Tesla the the perpetual motion ponzi scheme. This is Enron part two!!!

    Comment by Kevin Mills — February 27, 2017 @ 3:49 pm

  3. @SWProf…It is priceless that Musk’s latest scheme is…digging a hole! Of course the press gussys it up real pretty-like: “Oh, it may sound crazy, but not as crazy as the flying cars suggestion…” (as if two ideas can’t be crazy simultaneously). Anyway, a lot of the press is afraid of losing their job, so there won’t be critical analysis of a darling.

    Comment by Richard Whitney — February 27, 2017 @ 6:06 pm

  4. Pity Elon won’t be one of the pax going on a free return to the Moon. Better yet, to the Sun.

    Comment by The Pilot — February 27, 2017 @ 8:20 pm

  5. TSLA took a hit today, but things remain bullish in the intermediate term. Investors are acquiescent, brand is strong, and underlying conditions are supportive. Will be hard to short that combination.

    Comment by FTR — February 27, 2017 @ 11:42 pm

  6. No doubt Musk is seriously massaging the figures in the short term, but on a horizon of about a year, people are clamouring to buy his cars and are prepared to put down deposits. And with his huge investment in battery production, the cars are only going to get cheaper to make. So the real test will be whether Tesla can show a profit once the Model 3 is making deliveries. Meet you all back here in 12 months? 🙂

    Call me a fanboy if you want, but I am still very firmly in the camp that if he can get satellites into orbit reliably (a feat that entire governments have occasionally failed at, even with much larger budgets), then he can squeeze a profit out of EVs…

    Comment by Hiberno Frog — February 28, 2017 @ 9:35 am

  7. You’re a fanboy! Tesla is grade-A BS

    Comment by The Pilot — February 28, 2017 @ 9:54 pm

  8. Space X had the ability to make huge improvements over state of the art because the government monopoly space programs never put a priority on low-cost or efficiency. The auto business, however, has been very competitive over a long time, and firms have gone through great travails in learning how to reliably produce large numbers of high-quality vehicles.

    Comment by srp — March 2, 2017 @ 8:29 pm

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