Tesla’s earnings story is a religious war

What now?
What now?
Image: Joe Skipper/Reuters
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Tesla is a religion. There are heretics, true believers and the rest of us. The latest victim in this holy war is Wall Street Journal automobile reviewer Dan Neil. Last month, he wrote a laudatory review (paywall) of a tricked-out, $78,000 Model 3 that enraged Tesla’s online foes: “If you were hoping Tesla would fail on account of the Model 3 I’ve got bad news: This thing is magnificent.” But Neil’s review didn’t pull punches. He knocked Tesla’s factory as a “vertically integrated madhouse … the Kobe beef of lean production” and indirectly called CEO Elon Musk a “putz.” People raging against Tesla lost it anyways. Neil was bombarded with so many online attacks he deleted his Twitter account. 

It’s more civil on Wall Street, but financial analysts aren’t anywhere near a consensus either. Bulls are calling for a share price above $500 while Goldman Sachs suggests $195. (It currently trades at around $295.) The latest recommendations are split between 10 buys, 11 holds and 11 sells. Tesla’s second quarterly earnings report on August 1 (listen to it here  at 2:30 PM PST) will only give new ammunition to all camps. 

As you might have concluded from the lack of accord, Tesla’s stock trades on faith more than fundamentals. It’s a business no one fully understands, and ideological fever is running high on both sides. Does Tesla sell electric cars or energy? Batteries or solar panels? Do its financial shenanigans and misleading statements constitute outright fraud? All of the above? The tension is evident in Tesla’s status as one of the most shorted stocks in the US, and one of the world’s most valuable car companies. By market cap, it eclipsed Peugeot (April 2012), Fiat Chrysler (May 2013), Suzuki (June 2013), Renault (Feb. 2014), Hyundai (June 2015), Nissan (Feb. 2017), and Ford (April 2017). By comparison, Tesla generated just 8% of Ford’s $157 billion in sales last year.

AutoNation CEO Mike Jackson said Tesla’s “inexplicable” valuation could be “one of the great Ponzi schemes of all time” (or it just might “all work out”). Hedge fund manager David Einhorn compared enthusiasm for Tesla to the 2000 dot-com bust. Jim Cramer of The Street squawked Tesla was a “cult stock.” Even Musk has admitted Tesla stock is “absurdly overvalued” based on past performance, although stock options in his pay package (paywall) will only vest if Tesla’s market value soars 13-fold to $650 billion over the next decade.

Yet it’s possible the storm clouds are parting for Tesla (or is it the calm before the next storm?). The company cleared (barely) its latest production hurdle by building 5,031 Model 3s in the last week of June, easing doubts the carmaker won’t ramp up production fast enough to avoid bankruptcy. (In April, Goldman Sachs predicted it would only achieve a sustainable rate of 1,400 Model 3s per week). Musk now feels he has reason to boast. “If we execute according to our plans, we will at least achieve positive net income excluding non-cash stock based compensation in Q3 and Q4 and we expect to also achieve full GAAP profitability in each of these quarters,” Tesla told shareholders (pdf) in May. It predicted “highly positive” gross margins by September. “It worked,” Musk told employees in a memo after reaching the 5,000 milestone in July. “I think we just became a real car company.”

But not all is well under the hood. Tesla remains deep in production hell with factory workers working overtime to ramp up production. The newest Model 3 assembly lines are housed under a semi-permanent tent at its overflowing Fremont factory. Critical executives have left or taken leave from key programs. Tesla has also asked suppliers for refunds on past and future work. Pouring fuel on the fire has been Musk’s erratic behavior on Twitter. Since January, he has leveled malicious (and baseless) accusations against perceived enemies, prompting even Tesla investors to question his judgement. While his Twitter activity has fallen off a bit since hitting its frenetic high in May, Musk’s last quarterly call left many observers unsettled: He refused to answer Wall Street analysts’ questions and turned over questions to the host of a little known YouTube investment channel. Musk himself later called the outburst “foolish.” 

Plenty of people are outright betting against Musk. Steve Eisman, who famously predicted the collapse of the subprime mortgage derivatives that caused the financial crisis and is the subject of the movie The Big Short, said he’s now shorting Tesla for “execution problems.”

“Elon Musk is a very, very smart man,” he told Bloomberg in July. “But being smart is not enough. You’ve got to execute. He’s got execution problems” citing negative cash flow, poor autonomous driving technology, the exodus of executives, and competition from the likes of GM, Porsche, Volvo and Volkswagen. Short sellers are still building their positions, now up to 34 million shares, or 27% of Tesla’s publicly available stock, despite losing as much as $2 billion per month as Tesla’s stock price continues to defy their predictions. Investors are targeting Tesla, not the auto sector as a whole. Short positions against Ford  and GM amount to just 2.6% and 1.7% of publicly available shares, respectively, according to Sentieo.

Intimations of grandiosity and paranoia by Musk are making some uneasy. The specifications of Tesla’s new Semi truck seem to defy the laws of physics, say experts. A lawsuit (pdf) against former employee Martin Tripp for industrial espionage (whom Musk called “a horrible human being”) may turn into an investigation by regulators. The US Securities and Exchange Commission recently granted Tripp an uncommon whistleblower interview in July over his charges of  millions of dollars in waste, safety concerns, and lying to investors. US safety regulators are also investigating the company’s multiple Autopilot-related crashes.  

Of course, that’s business as usual for Tesla. The electric carmaker has hardly gone a year without weathering a major crisis. Tesla’s true believers say this time will be no different. A few numbers support their case. The company has spent freely to ramp up production before the release of each of its new models (the Roadster, the X and then the S). After the model launched (late and over budget), Tesla basked in a quarter or two of free cash flow before dumping money back into the next product cycle. The Model 3, in this telling, is just the next success. Musk told investors in February that the Fremont, California, factory is capable of churning out 600,000 vehicles per year (last year Tesla only managed just 100,000). Even if things do go south, true believers claim, Tesla will be able to borrow against its physical assets, trim back product lines, or tap a bailout from Musk who has billions of dollars of equity in SpaceX, the aerospace company he founded in 2002.    

Critics call Tesla “structurally bankrupt,” saying the shell game has to stop eventually. It’s facing massive new costs to build the expected Model Y crossover, the Tesla semi, and the new Roadster. Two Gigafactories are being contemplated for China and Europe. The bill for all this will run into the billions. Tesla expects (pdf) the Gigafactory 1 in Nevada alone to cost more than $5 billion (Tesla is sharing the expense with Panasonic). With the company burning $2.4 billion last year, more than twice the rate in 2016, and just $2.7 billion in reserves at the end of March, where will the money will come from? 

The answer depends on whether Tesla executes its plan while keeping costs low and customers happy. This last bit could prove to be Tesla’s salvation. People love Tesla in a way few other brands can match. Michelle Krebs of Autotrader says Tesla scores at the top among carmakers in virtually every category it measures. Despite the Model 3 arriving late, overpriced, and plagued with initial production issues, customers have scarcely blinked. There are still 420,000 reservations for the car that will only be more expensive once the US $7,500 US tax credit begins phasing out later this year. And what other company can claim its customers give up their weekends to offer “10,000 test drives” at car shows, as 76 Tesla owners in the UK did last month. Even Tesla’s stunts sell out. In the last year, Tesla has sold millions of dollars worth of “flamethrowers” (overpriced roof torches) and surfboards on a lark.   

No matter what happens this quarter, Musk can declare victory of sorts. Tesla could disappear tomorrow, but the events it helped set in motion will continue. Global investment in electric vehicles last year soared to $90 billion, up from a rounding error just a few years ago. Norway is the first country in the world where more than half the vehicles sold are electric. All the world’s major carmakers, after decades of half-hearted tinkering, are building electric vehicles to compete with Tesla. Country after country is announcing a phase-out of internal combustion engines. 

Not all of this is attributable to Tesla, of course. Electric vehicles were always a global project. When costs fall below that of conventional cars, their arrival seems inevitable. Experts now say the day of price parity will come as soon as 2025. That would be almost unimaginable without Tesla, whose success has brought serious competition.

Everyone is gunning for Tesla now. It’s not at all clear the company’s improvisational culture can withstand the relentless onslaught of carmakers with far more money and experience mass-producing cars. But by the time Tesla’s fate is decided, we’ll probably all be driving electric cars anyways.