Thursday, April 25, 2019

Hail Marys and the limits of the hype economy

Events are moving quickly and in a very bad direction for Tesla.

The company reported Wednesday that automotive revenue in the first quarter fell 41% to $3.7 billion from $6.3 billion in the previous quarter, a far steeper drop than expected for sales of all its electric-cars — the Model S, the Model X and the Model 3.

Total sales, including Tesla energy and battery storage products, fell 38% to $4.5 billion from $7.2 billion.

The sales slump in turn slammed the company’s bottom line. The company turned unprofitable again after two rare quarters of positive earnings. The net loss was $702 million, after a $139-million profit in the previous quarter. (The first-quarter loss was close to what the company recorded in the year-earlier period — $709 million — when it was grappling with fundamental manufacturing problems.)
Scarce cash got even scarcer. Cash on hand dropped from $3.69 billion at the end of last quarter to $2.2 billion. That included paying off $920 million in convertible bonds.

Operating cash flow turned negative — a net $640 million going out the door over the three months versus a positive $1.23 billion in the previous period.

Tesla shares, down about 22% for the year through Wednesday’s close, were up slightly in after-hours trading Wednesday, to about $259 a share.

Where the money for such projects will come from is unclear. Musk was asked why he doesn’t raise money through a debt or equity sale. Musk said he’d rather focus on efficiency first. “I don’t think raising capital should be a substitute for making the company operate more effectively,” he said. “I think it’s healthy to be on a Spartan diet for a while.”

Without an infusion of equity or debt, major expansion would require healthy cash flow. But cash flow has gone negative. Capital spending, which funds assembly lines and other manufacturing operations, has been declining. It fell from $325 million in 2018’s fourth quarter to $280 million in 2019’s first quarter. The number topped $1 billion in the third quarter of 2017 and has fallen with each quarter.

Not surprisingly for those who have been following his career, rather than tamping down expectations, Elon Musk has responded with even more incredible promises (from a couple of days ago:
Tesla’s aim is to create a fleet of self-driving cars that can be used as robot taxis in what Musk is calling the “Tesla fleet.” The company will manage the apps and software. Tesla owners could let their cars out for robo-taxi use, with the company keeping a percentage of the revenue. Tesla would also operate its own robo-taxi fleet.

“We expect to deploy the first robo-taxis with no one in them next year,” Musk said Monday. “I’m confident we’ll get regulatory approval somewhere.”
Make no mistake. Musk is talking about level 5, fully autonomous vehicles, something that, as far as we can tell, no one is even close to. Most researchers put this functionality at least a decade away, which is why the focus has shifted to finding ways to get the most out of level 4 AVs.

Even by his standards, this is an audacious claim, but the stakes are stunningly high. The valuation of Tesla has always been based on a combination of hype and the "real life Tony Stark" persona and there are still investors who want to believe (as well as those who don't).

The range in target prices for Tesla stock is almost bizarre, reflecting wildly different opinions about Tesla’s growth prospects. The stock closed trading Monday at $262.75 a share, down 3.9%.

The Ark Invest money management group sees Tesla trading at $4,000 as self-drive technology becomes more popular. Ives puts an “outperform” rating on Tesla, with a 12-month price target of $365.

At the other end of the spectrum, Garrett Nelson of CFRA recommends Tesla stockholders sell, with a target price of $225 a share. And short sellers have set a target price as low as zero.

I suspect that a lot of the visionary pronouncements and proposals about giant underground slot car racing sets  and brain-computer interfaces we've been hearing about recently have less to do with the projects themselves and more with maintaining a futuristic aura around Musk, and thus propping up the stock a little bit longer.

It worked for a long time but even in the hype economy, there are limits.


  1. Mark:

    This is not quite right, but I keep thinking of an analogy between Elon Musk and Henry Kissinger. Both had (have?) reputations as geniuses, both went far via connections with powerful people, both had adoring press coverage, and, for both of them, their enablers in the news media are paying no price (in terms of their careers) for doing so.

    The other key comparison: Both Musk and Kissinger have suffered grotesque failures in what would have to be considered their key advertised competencies: Musk in high technology and Kissinger in diplomacies.

    1. If memory serves, Kissinger was known in the Nixon White House as a relentless and shameless self-promoter, gifted at grabbing credit and dodging blame. Musk made his rep convincing people that he founded PayPal and Tesla, and that he came up the work of his engineers (not to mention those at TRW).