- During the past few months, Tesla CEO Elon Musk has shut down stores, lowered prices, had layoffs, pivoted the business, and raised billions, but none of it seems capable of restoring investor faith in Tesla.
- The company’s stock is down by about a quarter this year.
- What’s more, it doesn’t look as if any of Tesla’s lines of business will provide the revenue to grow it out of its financial troubles, and more legal trouble may be on the horizon.
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Tesla just raised $US2.7 billion but still looks desperate as – once again – financial and legal questions surrounding its survival mount.
Perhaps tellingly, the market couldn’t seem to care less about this $US2.7 billion – or $US2.3 billion net of hedging and fees to be precise. Tesla’s stock has fallen by about a quarter over the past month as analysts up and down Wall Street chop their stock-price targets and forward-looking estimates at a steady clip. Wedbush Securities called it a “code red.” Evercore said Tesla could justify its current valuation only with “supernatural growth.”
This is all to say that Tesla should be enjoying a post-capital-raise honeymoon with Wall Street, but it’s not. According to the company, this capital raise was merely supposed to shore up Tesla’s balance sheet during an “air pocket” in sales. In the first quarter, Tesla delivered only 63,000 cars, a roughly 31% drop from the quarter before. And most devastatingly, Tesla was hit hardest on its most lucrative cars, the luxury Model S and Model X, which saw their sales fall by more than half. As of March 31, its working capital deficit alone was $US2.2 billion.
This after the two previous quarters had been the first consecutive profitable ones in Tesla’s 16-year history. Those gains would be wiped out by Tesla’s first-quarter loss of roughly $US900 million.
Nine hundred million dollars isn’t “air pocket” money, and, according to experts, had Tesla tried to raise capital last year instead of going on what CEO Elon Musk called a “Spartan diet,” things might now look different.
“Tesla could’ve more easily gotten money last year when the stock price was high,” the former Securities and Exchange Commission economist and current Carnegie Mellon professor Chester Spatt told Business Insider.
It also could’ve gotten more money without raising as many eyebrows, Spatt said. But asking for more in its weakened state, he said, “would have been an adverse signal.”
Yet Tesla’s financials are not the only thing ailing the company, which has recently gone through layoffs and seen stores close and prices lowered. Tesla has stopped pushing its $US35,000 Model 3 sedan – the margins just don’t work.
Reports of changes at Tesla’s Gigafactory 2 in Buffalo, New York, also indicate that Tesla is having issues with its solar business. Reuters reported that most of the solar cells produced there would be sold overseas – not used to make Tesla’s solar rooftops – and that the factory would be used to make other products for Tesla’s cars.
Then there’s China. Tesla is building a third Gigafactory in Shanghai to produce and sell Model 3 and Model Y cars to the Chinese market – but it’s a market under extreme stress. In April, car sales there fell 17.7% from the same month a year before.
In the past, the Chinese government has come to the rescue when auto sales turned down, but this time any relief is likely to come in the form of a more general tax cut meant to speed up the domestic economy. If that’s the case, some analysts fear that relief wouldn’t translate to more car sales.
“I don’t think buying a car will likely be something that [Chinese consumers] would do with the money,” said Tu Le, the founder of the consultancy Sino Auto Insights. “Remember that the average salary is still low when compared to the United States.”
On top of all of that, Tesla has had some major technical scares. Over the past few months, there have been multiple reports of Tesla Model S vehicles spontaneously combusting while parked. One incident took place in Shanghai, another in Hong Kong, and yet another in San Francisco. And last week, the National Highway Transportation Safety Agency determined that Tesla’s Autopilot function was engaged at the time of a fatal crash in Florida in March involving a Model 3.
What is it all for?
Autopilot’s function will be critical for the destiny of the company. In a private call with investors earlier this month, CEO Elon Musk said robo-taxis were the future of the company. He said that they would turn Tesla into a half-a-trillion-dollar company and that Tesla would have a million of them on the road by spring 2020.
Everything else in Tesla’s business, he said – solar roofs, $US35,000 Model 3s, the China buildout – takes a back seat to that.
The idea that Tesla’s Autopilot technology – or even self-driving technology in general – is ready for wide use has been met with scepticism from almost all of Tesla’s competitors. But on the call, Musk claimed that getting regulatory approval for the robo-taxis would be “relatively easy.”
That was just on the call, though. None of the public documents Tesla has produced to the SEC or investors mention such a plan. The plan received just a passing mention on Tesla’s first-quarter earnings call and some discussion during the company’s Autonomy Investor Day in April. Neither of those instances firmly attaches Musk’s grand and detailed robo-taxi vision to the $US2.7 billion offering.
The underwriters Citigroup and Morgan Stanley declined to comment on the difference between the private call and the offering documents. Tesla’s law firm, Wilson Sonsini Goodrich & Rosati, and its auditor PwC declined to comment as well. Goldman Sachs and Tesla did not respond to multiple requests for comment on this matter.
Legal experts have found the investor call’s departure from the offering documents strange. As the attorney Tom Gorman, a partner at Dorsey & Whitney LLP who specialises in securities-fraud cases, told Business Insider: “If you go out to people and say you’re going to use the money for something and then you use it for something else, that’s a big no-no.”
That is why, he said, “this deal looks weird.”
What Gorman said was even weirder was that a company of Tesla’s size and resources would have a discrepancy like this. Investors frequently bring charges against companies that spend money on purposes outside what executives stated, but usually those companies are much smaller than Tesla’s $US50 billion market cap.
“If it was some microcap company created out of a reverse merger, you’d say ‘probably a fraud,’ but that doesn’t make sense for a company like Tesla,” Gorman said. “You’re asking to get sued into oblivion.”
He added: “There must be some logical reason for this. I can’t imagine what that is, but it’s just silly.”
Musk seemed to further depart from that stated purpose when he told employees in an email that the money the company raised was only enough to get Tesla through 10 months of operations at its first-quarter capital-burn rate.
That contradicted what Musk said on the investor call. There he said Tesla didn’t “expect to spend this capital. We expect to fund our activity out of our growing cash flow, but we think it’s probably wise to have at least some buffer here, some cash buffer between now and say summer next year (h/t @Paul_M_Huettner).”
To short-sellers, this kind of behaviour reeks of desperation, and they think the stench will only become more odorous after Tesla reports its second-quarter numbers in August.
“Tesla is grabbing as much cash as they possibly can before the stock tanks,” said Gabe Hoffman of Accipiter Capital, an outspoken short. “They’re still projecting 90,000-100,000 deliveries in Q2 and they will be lucky to get closer to 70,000. Then there’s a cliff in Q2 because of the tax credit phasing out and cash will be burned in Q2, Q3, and Q4. This company was almost functionally bankrupt on March 31st and this raise will barely get them through the year.”
If that’s the way you look at it, the headwinds are coming for Tesla. And there doesn’t seem to be a tailwind in sight.
Editor’s note: An earlier version of this article included an incorrect estimate of Tesla’s April vehicle sales in China.
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