In short, it matters because Tesla made set some very bold, time-constrained goals for itself, forecasting it would become both cash flow positive and profitable in the second half of 2018.
The electric-car company’s iconic CEO, meanwhile, has made an even bolder claim. “We will not be raising equity at any point,” Musk said during the second-quarter conference call.
Instead, Tesla is trying to raise cash with creative maneuvers that will impact the income statement. Tesla is doing something it’s never tried before: raising money the old fashioned way by being profitable.
However its rush to achieve these arbitrary deadlines isn’t only markedly different from how TSLA has behaved in the past, it’s also not how healthy companies, confident in their long-term future, behave. In the end, these actions could also alienate customers and diminish long-term growth.
Signs of desperation. Combined with Musk’s famed inability to meet his own deadlines, the following collage of actions paints Tesla in a desperate light, and could presage a gloomy future for TSLA stock owners.
No more free rides. Under its referral program, Tesla once offered free use of its supercharging stations for life for Model S and Model X buyers. But with cost-cutting a priority, that sweet perk — one that no fossil fuel-run cars could compete with — was discontinued in September.
Granted, not everyone agrees that’s a sign of desperation.
“It’s a future cost management issue and is smart. They have to keep paying for the power for all the existing owners who have lifetime supercharging — like me,” says Model X owner Ted Gavin, managing director and founding partner of Gavin/Solmonese, a restructuring and corporate insolvency firm.
Fewer color options, higher prices. “Moving two of seven Tesla colors off menu on Wednesday to simplify manufacturing. Obsidian Black & Metallic Silver will still be available as special request, but at a higher price,” Musk tweeted on September 11.
Several other color options too, most notably “Red Multi-Coat,” which has skyrocketed in cost from $1,000 to $2,500 over the last year, have seen huge price increases.
Slashing capex. TSLA has been gutting capital expenditures, the money spent to acquire or maintain fixed assets, dramatically this year, reducing its projected 2018 capex costs from $3.4 billion at the beginning of the year to less than $2.5 billion by the end of the second quarter.
Research and development expenses, meanwhile, fell from 17 percent of revenue in the first half of 2017 to 13 percent in the first half of 2018.
“This is potentially not a good sign, because most of the growth Tesla experiences is based on investments in capital assets and R&D,” says Egor Matveyev, a visiting assistant professor of finance at MIT Sloan School of Management. “If they’re cutting those expenses, that potentially affects long-term prospects.”
TSLA using Model 3 demand as ATM. Tesla unveiled its Model 3 in spring 2016, and within two weeks nearly 400,000 people paid $1,000 to “reserve” their futuristic electric vehicle. If customers want to upgrade their reservation to an actual order, they pay another $2,500. Halfway through 2018, Tesla had delivered just over 28,000 Model 3s, so it’s still be anyone’s guess when your car will actually show up.
It is Tesla’s practice to require these order deposits for the Model S and Model X as well. Still, although the decision to open up North American orders for Model 3s in July will not directly affect the top line, it will give TSLA some much-needed cash flow.
Implications on TSLA capital raise, long-term prospects. So, will the drastic measures Tesla is taking be enough to prevent them from having to raise more capital?
Matveyev notes that TSLA has $2.2 billion in cash on hand. In Tesla’s Q2, free cash flow was negative — by about $740 million. In the first quarter, it burned over $1 billion.
“So at this rate they’re going to burn all the cash they have in the next three quarters,” says Matveyev. Before then, he says, the market would notice the trend, and sell the stock down before Tesla has a chance to issue new shares.
Richard Chaifetz, a neuropsychologist, chairman of investment firm Chaifetz Group and CEO of ComPsych, the largest provider of employee assistance programs, has a similar view. “My read of the financials tells me that they still need to raise capital,” says Chaifetz.
Market observers think a capital raise will be necessary soon. And even if Tesla’s recent string of hasty moves to raise capital creatively and cut costs works out, the opportunity cost could be steep: the long-term growth potential of TSLA.
Then of course, there’s a third possible outcome: Tesla doesn’t have to raise capital, and doesn’t hurt its growth potential, because it becomes fundamentally sustainable.
There’s just one problem with option three, Chaifetz says. It’s essentially not possible, he says, “unless they make dramatic changes in production or cost structure, which I think is unlikely.”
Musk’s mania. Perhaps given Tesla’s bind, Musk’s recent bizarre behavior — especially the infamous “funding secured” tweet that said TSLA may go private for $420 per share — makes a bit more sense.
Going private would erase constant short-term pressures to do things that arguably aren’t in the best interests of long-term shareholders. It would also help him save face if Tesla does need to raise additional money soon.
Ironically then, it may be Musk’s desire to do what’s best for the company that caused another threat to the TSLA stock price: heat from the Department of Justice and Securities and Exchange Commission over the “funding secured” tweet.
“When I hear ‘secured’ I hear signed, sealed, delivered,” says Chaifetz. It doesn’t appear such funding was proverbially signed, sealed or delivered, and the DOJ has launched a criminal probe into Tesla over the matter.
Still, Musk is so indelibly attached to Tesla, that his antics won’t likely cost him his job.
Matveyev, who has done research on the amount of shareholder value that good CEOs account for at their companies, says, “Removing him from his role is an absolutely unthinkable decision; I’m sure the board is not even contemplating it.”
“On average young founders account for as much as 10 percent on their firm value,” says Matveyev. In Musk’s case, if I were to guess, that number is probably much larger.”
If you follow Tesla, it’s not unreasonable to think that news of Elon Musk leaving the company would result in TSLA stock losing more than 10 percent.
The going-private debacle aside, Musk’s recent behavior has been worrisome at a minimum: He smoked weed on a filmed podcast with Joe Rogan, petulantly insulted analysts on an earnings call, publicly called a Thai diver a “pedo” and has routinely hurled insults at critics on Twitter.
Do or die. Tesla, right now, is a desperate company with an increasingly erratic leader, and no chief operating officer to de-stress Elon and provide much-needed operational guidance.
Why do people still believe Elon? How many more deadlines does Tesla have to miss before the market starts pushing the stock down?
“Musk gets people excited. He not only thinks outside the box and comes up with big, bold ideas — he performs,” says Chaifetz. “But real businesses and real companies live off one thing: profits and cash flow.”
Men lie. Women lie. Numbers don’t lie. The world will know soon whether after 15 years of losing money, Tesla can avoid raising more capital by relying on good old-fashioned profits and free cash flow.
That’s the type of funding investors really want to see secured.