2. The Bad
With Tesla Inc (NASDAQ: TSLA), good news is always bundled with bad, some of it caused by macro events but much of it the consequence of self inflicted wounds:
- Debt load and Distress: When Tesla chose to add to its debt burden by borrowing $5 billion in 2017, I argued that there was no good reason for Tesla to borrow money, since money losing companies gain no tax benefits and debt put growth potential at risk. Tesla has since added to that debt, using the false logic that it needed to borrow money to fund its growth; a much better option would have been to raise equity, the dilution bogeyman notwithstanding. In June 2019, that debt, now close to $14 billion, is revealing its dark side, as a bond price plunge and ratings downgrades threaten to put Tesla’s growth story at risk.
- Reinvestment Lags: Growth requires reinvestment, and especially so for automobile companies, where assembly lines and logistical infrastructure need to be put in place for cars to be delivered to customers. It is both frustrating and puzzling that Tesla, a company with a loyal customer base that is willing to wait, has been unwilling to make the investments that it needs to meet the demand. Instead, the company seems to lurch from one production crisis to another one (remember the tents that had to be put up to reach the 5,000 cars/week target) while its CEO muddies the water further by arguing that the company is not just earnings positive but cash flow positive. At the moment, the Fremont plant remains Tesla’s major production facility, and while a plant in China is supposedly set for production late in 2019, the US/China trade war and Tesla’s own tangled history on operating delays leads to skepticism.
It is also worth noting that a significant part of Tesla’s time has been spent extracting itself from another unforced error, its acquisition of Solar City in 2016, with cost cuts and employee layoffs that are incongruent with a company claiming to tell a great growth story.
3. The Gobsmacking
An investor in Tesla should earn a special premium for having to endure news stories about the company that are so unusual that they would be considered fiction at other companies. Just to give a sampling, here are the other items that added to the smoke around the stock:
- SEC Oversight: If there has been a recurring story over the past year, it has to do with the aftermath of Elon Musk’s “funding secured” tweet, which led to a SEC investigation and a threat of sanctions on the company. While the company came to a settlement wit the SEC, that settlement requires restraint on the part of Musk on future disclosures to the market (especially in the form on tweets), and restrain is not a Musk strong point.
- Autonomous Cars: In April 2019, Musk unveiled a plan to roll out autonomous taxis, with Tesla owners being allowed to add to the network, in the near future, with the promise that Tesla’s technology on auto driving was well ahead of the competition. There is a debate worth having about autonomous cars and how they will change the ride sharing business, but it is almost certain that this will not happen smoothly or soon.
- The Rest: This being Tesla, there were the weekly distractions as Musk muddied the waters with talk of electric leaf blowers and insurance products.
An Updated Tesla Valuation
For the bulk of its existence, Tesla has been a story stock. That remains true, but as the company ages and acquires substance, you can argue that the story is getting more bounded. In this section, I will update my Tesla story and valuation first, then look at the uncertainty around the valuation and close with a comment on a “valuation” by ARK Invest, one of Tesla’s biggest institutional cheerleaders.
