Why Wall Street's worried about Tesla

May 4, 2018 by Stan Choe And Alex Veiga
Why Wall Street's worried about Tesla
In this Feb. 6, 2018, file photo, SpaceX and Tesla CEO Elon Musk speaks at a news conference in Cape Canaveral, Fla. Tesla is a company of big ideas, but its stock is falling because of much more practical concerns. (AP Photo/John Raoux, File)

Elon Musk's track record for technological feats as chief of SpaceX has turned skeptics into believers in everything from his quest to open space travel to Mars to his desire to build a tunnel for high-speed travel between New York and Washington. As Tesla's CEO, his ambitious vision for electric cars has also earned him a faithful following.

But now Wall Street is taking a more practical tone, increasingly questioning Musk's assertions of when the company can turn profitable. Tesla may ultimately be forced to sell new shares of its stock or take on more debt to bolster diminishing cash.

Shares in the electric car company slumped 5.5 percent Thursday, a day after it reported its first-quarter results and Musk's remarks during an analyst conference call that left many investors scratching their heads.

The stock recouped some of its losses Friday, closing up 3.4 percent at $294.09. Tesla shares are still up more than fourfold over the last five years. The S&P 500 has risen about 65 percent in the same period.

Concerns, however, remain. Here's a look at some of the more pressing ones that Wall Street has laid out for the former darling of the investment world.

___

CASH BURN

Tesla is not turning a profit, which means it has to use cash to pay the bills. The big question from investors: Does Tesla have enough?

Tesla went through nearly $400 million during the first three months of the year to make its cars, pay its sales staff and cover the other costs of running its business. Another $656 million went to spending on equipment, facilities and other capital projects, for a total of slightly more than $1 billion.

Analysts call this situation "negative free cash flow," and it helped cut Tesla's cash balance to $2.7 billion at the end of March. If the company keeps burning through its cash at the same pace, it could run out within a year and be forced to sell more of its stock or borrow money.

Tesla says it won't come to that. The company expects to take in more cash than it spends in the second half of this year. Some of that will likely be due to planned spending cuts on machinery, equipment and other capital expenses.

___

DEBT

Reining in spending will help, but Tesla still faces hefty debt payments over the next 12 months.

The company has to pay back $1.3 billion in debt that comes due later this year and in early 2019. And to do so, while covering its expenses, it will have to raise or borrow $2 billion, according to Moody's analyst Bruce Clark.

Tesla's spending and reliance on debt also has analysts at Morningstar concerned.

Last month, Morningstar Equity Strategist David Whiston wrote that it's "nearly guaranteed" that Tesla will have to raise more cash.

"But if the capital markets close to them, then the recent plunge in the stock price will look trivial compared with what will happen then," Whiston wrote.

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PRODUCTION ISSUES

Tesla expects it will become profitable later this year. But that hinges on a big "if." To do so, Tesla has to ramp up production of its Model 3 electric car to 5,000 units a week. The company says it may reach that level in about two months. Just prior to a planned shutdown in mid-April, Tesla was producing Model 3s at a rate of more than 2,000 a week.

To get there, Tesla will need to smooth out problems it's encountered as it tries to make the production more automated, a process that it calls the "machine that builds the machine."

Tesla acknowledged on Wednesday that it was overly ambitious in its efforts and that it "made a mistake by adding too much automation too quickly." One example Musk gave was of a machine that placed fiberglass mats on top of battery packs. The company found that human hands are better than machines at picking up these pieces of fiberglass, which Musk said look like "fluff."

In response, Tesla stopped using the "flufferbot" and dialed back automation in other areas, bring back some human workers. That raises costs, reducing how much profit Tesla can wring out of the cars.

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INVESTOR CONFIDENCE

A big part of Tesla's share price is investors' faith in Musk.

They've poured dollars into Tesla stock on the belief that the CEO, who previously helped nurture PayPal and whose other company, SpaceX, launches rockets and spacecraft, can revolutionize the auto industry.

But some of that investor confidence may have been shaken following Musk's behavior on a conference call with Wall Street analysts on Wednesday.

At one point, as analysts peppered Tesla executives with the usual litany of questions about the company's operations, Musk dismissed the queries, saying "boring boneheaded questions are not cool." He later cut off the "dry" questions from analysts, saying "they're killing me." He then went instead to a self-described "finance nerd" who runs a YouTube channel and was asking questions on behalf of retail investors.

Wall Street did not take too kindly to the remarks.

"Investor feedback is that the performance shook confidence, which we'd argue is an important piece of the Tesla story," RBC Capital Markets analyst Joseph Spak wrote in a report.

Morgan Stanley analyst Adam Jonas called it "arguably the most unusual call I have experienced in 20 years."

Explore further: Tesla cash burn accelerates, CEO predicts profit ahead (Update)

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cantdrive85
5 / 5 (1) May 04, 2018
Why Wall Street's worried about Tesla


Probably because;
Tesla cash burn accelerates,

And their CEO responds with lies;
CEO predicts profit ahead

Shakescene21
not rated yet May 06, 2018
So Musk is lying by predicting Tesla will earn a profit. By your standards, you are lying if Tesla will earn a profit. I hope you are shown to be a liar.
rrwillsj
not rated yet May 06, 2018
I'm sorry S2 but as much as it galls me to defend cd8? He is not lying about Musk's words. As CEO of Tesla, Musk is required to give his shareholders an honest appraisal of his management.

If Tesla earns a profit? That would prove that Musk was not lying.

cd8 can be correct or incorrect as to whether or not Tesla will earn a profit. And whether or not Elon Musk is a liar or an honorable officer of Tesla.

Only if cd8 was an intimate of Musk could cd8 be accused of himself being a liar, repeating Musk's own words.
snoosebaum
not rated yet May 06, 2018
thinking of the railroads and internet [ global crossing ] , investors in new tech get creamed , the new owners see the profit
Shakescene21
not rated yet May 06, 2018
@rrwills: If Musk honestly believes that Tesla will make a profit in the second half of 2018, then he is not a liar, regardless of whether the company actually makes a profit.

However, CD8 says that Musk is a liar. This assumes that either (1) CD8 knows that Musk doesn't think that Tesla will make a profit later this year, or (2) that CD8's logic is that, since he knows with 100% certainty that Tesla will not make a profit later this year, then Musk is a liar for disagreeing with omniscient CD8.

Shakescene21
not rated yet May 06, 2018
More simply: if I call a man a liar and he turns out to not be a liar, then I myself am a liar.
Whydening Gyre
not rated yet May 06, 2018
More simply: if I call a man a liar and he turns out to not be a liar, then I myself am a liar.

Is it lying if he's just hopeful, but not sure?
cantdrive85
5 / 5 (1) May 06, 2018
I'm not the only one who thinks he is lying;
https://www.nasda...interest
He has to say what he says so he can still raise money from the gullible through stock sales. If he gave an honest assessment of the balance sheet, Tesla would close tomorrow near zero. He's the Delorean of the modern era.
rrwillsj
not rated yet May 06, 2018
I do not know if Musk is lying.

What I do know is, as chief executive for Tesla, Musk is required to be honest with his shareholders.

If Musk is too incompetent to monitor his firm's finances? That is one issue. Which would mean he is lying about his ability to manage a business.
Shakescene21
not rated yet May 07, 2018
@cantdrive
The data series you are referencing shows that short sellers have increased dramatically over the past year, although it has been by fits and starts. If you are proud to be in the company of the short-sellers, who are greedy pirates who make capitalism look bad, then you're not much better than they are.

I have seen charts comparing the price of Tesla stock with the number of shares shorted by the pirates. In rough terms, the price is negatively correlated with the number of shares shorted. The short-sellers jump in and out of the market as they swing between greed and fear, while the true investors are the longs who are mostly steadfast long-term supporters of Tesla.

I have long thought that short selling should be banned, for the good of the economy and to save capitalism from itself. The Tesla short sellers are some of the worst of their ilk.
Shakescene21
not rated yet May 07, 2018
As of April 13 the short sellers had sold short 23% of all of Tesla's stock, and that percentage may well be higher now. The short-sellers didn't own this stock -- the shares were "borrowed" from the accounts of retail investors by their stockbrokers, and then lent by the stockbrokers to the short-sellers who then sold the shares to long investors.

The short-sellers are creating a situation which may become a bloody trap for them -- a "short squeeze" in Wall Street parlance. As a practical matter the short-sellers are limited to selling no more than 40-50% of the outstanding Tesla stock. Musk owns 20% of the shares and institutional investors own over 30%. These large shareholders don't leave their shares with stockbrokers and will not lend them to short-sellers to sell short. Since the shorts must cover their positions by buying back shares, the stage is being set for an explosive surge in the price of Tesla shares if the short-sellers panic.
rrwillsj
not rated yet May 07, 2018
S21, I agree with your description of 'puts'. What makes short-selling such a gamble is that many, probably most, such campaigns are organized around a clique of inside-trader scoundrels.

In addition, the fees on both ends of the bet are rendered more lucrative by the usurious interest rates charged short-sellers.

You can bet hard money that the originators of this scheme have already cashed out, if they have any sense about cents.

The gullible Public, pretending they are competent traders, are chasing the rainbow. Once again to find themselves left holding an empty bag of promised profits. With a slew of debts. Yet another insult on top of injury, from the Wall Street Casino.

You don't belong to their fraternity? You are just prey.

As for the castrated regulators? "The only point of contention between the Wolf and the Shepard, is which one of them gets to eat the lamb!"
Shakescene21
not rated yet May 07, 2018
Yes, the biggest winners from this massive short-selling scheme are the stockbrokers. They are generating handsome fees every day by letting short-sellers sell shares that they "borrowed" from other customers' accounts. In addition to the commissions charged, they can charge special handling fees for the work involved in keeping track of these complicated transactions. I don't believe that the customers whose stock is being "borrowed" receive a single penny from these short sales.

You mentioned that the short sellers are being charged usurious interest rates. I didn't realize that short-sales could be financed by margin loans, because they are inherently riskier than long sales. But I'm not surprised because our "castrated regulators" will allow almost anything that makes a profit for Wall Street.
antialias_physorg
1 / 5 (1) May 07, 2018
Why Wall Street's worried about Tesla

The title says it all...."Wall Street"...i.e. the guys who want to make a quick buck. The have been shorting Tesla for close to a decade (and been keeping losing money on that bet all that time), so understandably they're miffed.

Say about Musk's endeavours all you want. He may deliver everything later than promised, but so far he has delivered everything - from reusable rockets to solar roofs to the roadster, the model S, the model X, the model 3 to his boring apparatus.

If I were a betting man I'd stick with the pattern.
rrwillsj
not rated yet May 08, 2018
a_p, obviously you are NOT a betting man. You are an investor who seeks to avoid being victimized by predatory brokers.

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