A mission (or outcome) driven company can only continue its mission if it can be financially viable.
A non financially viable incarnation of a mission driven business will not be able to further its cause compared to its longer lived version. At some point a reckoning will come and take away the path to your objective.
This just simply isn't true. Losing the money means they spent it and got nothing for it. But every penny they spend, they get a lot of things - battery technology, market share, mindshare, network effect lockins (superchargers), etc. Tesla isn't losing its money, its investing it.
Also,
> The purpose of Tesla is not to make money; it is to pioneer fleets of smart mass-market electric cars, and the infrastructure to support them, and battery technology which is not limited to cars. Making money is ancillary.
This is also false. It buys into Elon's marketing and it's false. The purpose of Tesla is to make money. Elon likes to say that it's not the money he is after, it's the faster pace of adoption for electric cars. But he also knows that the fastest way for this to happen is for Tesla to make money. The author is false. The purpose of Tesla is indeed to make money.
> This just simply isn't true. Losing the money means they spent it and got nothing for it. But every penny they spend, they get a lot of things - battery technology, market share, mindshare, network effect lockins (superchargers), etc. Tesla isn't losing its money, its investing it.
Yes, and such things are reflected in their balance sheet under "Assets" and "Goodwill". The problem with Tesla is that after accounting for their "Assets" and "Goodwill", they're still negative.
Unfortunately I believe the numbers you're citing are actually in relation to their Solar City acquisition. The roughly $1B figure you're citing is the valuation of Solar City, not Tesla.
> Either way, a far more interesting question, if (like me) you have no financial interest in the business’s success or failure, is: does it matter?
I guess the author has glanced over the billions of subsidies that come from taxpayers? [0] So ya, I think American taxpayers should care about Tesla's bankruptcy.
PS - The author of this article is the CTO of a company who's customer is, yup, you guessed it, Tesla. [1]
I would have said "and SolarCity" but of course Tesla owns SolarCity now.
It's really quite genius to build a really expensive solar roof tile when the tax breaks are for solar installations. Find a way to charge a premium price for a premium product (eg, a tile, not just a simple panel), get tax breaks for it all!
Half of what Tesla does is product engineering, the other half is financial engineering. Both are critical to their success on an accelerated time table.
I think you misunderstood your source [1]. He appears to be the CTO of a company that made a third-party app for Tesla owners, called TezLab. It does not appear to be affiliated with Tesla, and appears to have even rebranded at some point from "Teslab" to "TezLab". The closest relationship appears to be that the CTO owns a Tesla.
> HFC co-founders Ben Schippers and Will Schenk are both Tesla owners and wanted to levelup their driving experience, pushing the limits of the data being collected to help solve typical ownership problems that Tesla itself had not yet addressed and add a bit of fun.
I call bullshit on [0]. The government is buying goods and services from SpaceX. That's not subsidizing -- that's being a customer. It's particularly not subsidizing when the alternative suppliers of said goods and services are 3-7 times the price.
So does Honda. Theses fall under normal 'subsidies', hell Trump was known for getting similar subsidies on Hotels and golf courses that don't create large numbers of high paying jobs.
As long as it's local not federal money I don't see the need to complain, because it's not my money.
Just because everyone in the US is accustomed to larger companies being able to negotiate a lower tax burden doesn't mean that a transparent, regulated system of breaks and incentives is vastly more equitable and less vulnerable to corruption and capture. Individual states shouldn't be undercutting each other either and bidding away their revenue.
While I don't disagree, companies are forced to play this game lest their competition under cut them.
However, locations are forced to play the game from network effects which push companies out of small communities. So, banning this behavior is likely to make things even worse for small town America. Still, getting rid of this might be better, but it's not as clear cut as you might think.
Is there a single US corporation that doesn't rely on government handouts? Complaining only about Tesla seems disingenuous when you have massive handouts given to oil and gas companies, not too mention how many cities are offering Amazon what is equivalent to free reign if they get HQ2.
You can complain about corporate welfare but only complaining about one corporation isn't really fair. Walmart utilizes local police forces to skimp on internal security (not too mention using welfare to subsidize poor pay), Military companies relying on politicians literally stuffing their coffers while the Pentagon argues otherwise, resource extraction companies are given free permits to bleed the land dry, agricultural subsidies, 0% interest loans dictated through the Fed, the auto bailouts, the financial bailouts, propping up home prices through artificial means. The pattern seems to be taking tax dollars and giving them to corporations.
New York state is spending $750 million to build a solar panel factory in Buffalo for SolarCity. The San Mateo, Calif.-based company will lease the plant for $1 a year. It will not pay property taxes for a decade, which would otherwise total an estimated $260 million.
The federal government also provides grants or tax credits to cover 30% of the cost of solar installations. SolarCity reported receiving $497.5 million in direct grants from the Treasury Department.
That figure, however, doesn't capture the full value of the government's support.
Since 2006, SolarCity has installed systems for 217,595 customers, according to a corporate filing. If each paid the current average price for a residential system — about $23,000, according to the Union of Concerned Scientists — the cost to the government would total about $1.5 billion, which would include the Treasury grants paid to SolarCity.
Nevada has agreed to provide Tesla with $1.3 billion in incentives to help build a massive battery factory near Reno.
The Palo Alto company has also collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. The tally also includes some federal environmental credits.
And what percentage of the entire US defense budget amounts to a subsidy for the petroleum industry?
Not saying subsidies of either type are good or bad... just saying that it's not reasonable to accuse Musk's companies of excessive reliance on public funding, while neglecting the beams in his competitors' eyes.
People are blinded by so called conventional wisdom which is what business people built when working with conventional businesses to make it easier for them to understand what is going on, in most cases.
Tesla is not a conventional business. It is more of an edge case where you have to put your thinking hat to make sense of it.
> People are blinded by so called conventional wisdom
This seems to be the exact kind of thinking that led to the dotcom bust.
I've commented before on the whole Tesla valuation thing, and people try to think of it like a tech company, and want to value it like a tech company. Tesla needs to actually produce things in a factory, deal with regulations and supply chain, which are very conventional business problems, and where the trouble is.
Tesla is not a production company yet. Tesla is a promise of what it can be. The promise is that it can be one of the biggest, greatest and most important companies in the world, sometimes in the future. The current job of Tesla is not to start producing tons of cash, it is to maintain the faith that the promise will be fulfilled.
The faith is maintained in few ways:
- by constantly kicking ass technologically -- improving the products way outside of what competitors believed was even possible,
- by iterating crazy fast on their ideas -- something that conventional car companies will not be able to do. They won't be able to do because they would have to replace most of their management with people that are suited to this pace of change. Conventional car companies may flex muscles, but all their money will not be enough because the biggest problem doesn't lie in having the funds but in people. Funds are easy once you show you can do it, but getting the right people is much more difficult once you have large and established business.
- by showing they can maintain exponential growth until they are dominant force in the market.
> Tesla is not a production company yet. Tesla is a promise of what it can be.
A company that loses $1.5 Billion per quarter? Not even Amazon at "peak investment" had such horrible cash flow numbers.
There's very little value in a charity. If Tesla can't correct itself and actually start making money (or at very least: become a sustainable charity and prevent itself from losing money!!), then it simply has no future. It will eventually run out of cash and die.
That's the worry. If Tesla dies, then Tesla cars won't have anyone to take care of them, because Tesla's horrible model prevents 3rd parties from learning how to maintain a Tesla car.
> Tesla is not a production company yet. Tesla is a promise of what it can be.
Well, it's not exactly a startup anymore either, which is what it sounds like you're describing (escape velocity). They're a public company that has existed for some time. But like you say, really, it's valued on "faith."
> improving the products way outside of what competitors believed was even possible
None of their competitors have said anything Tesla has done is impossible, merely that it's been (and remains) unprofitable without crazy VC funding that Tesla is tapping into.
> by iterating crazy fast on their ideas -- something that conventional car companies will not be able to do
On the flipside - did you ever hear of conventional car companies with the kind of problems Tesla has, where they've overpromised/underdelivered on production rates by 20x - 30x? And they're stuck on elementary things like they don't know how to automate welding metal bits together?
> by showing they can maintain exponential growth until they are dominant force in the market
Can you show me the numbers supporting that claim? Tesla growth e.g. in number of vehicles sold from 2010 to 2016 isn't very different from the total automobile market in the US, which also grew almost 2x in the same period. If you look at it quarter by quarter, it's obviously linear growth for each of their models (Model S, Model X). And their total numbers for cars sold, revenue, income etc. remains at the sub-one-percent level as compared to GM, Ford etc.
> did you ever hear of conventional car companies with the kind of problems Tesla has, where they've overpromised/underdelivered on production rates by 20x - 30x
It is incredibly common for cars to have 3-4 month back orders. The Model 3 production is actually in-line with the original 'late 2017' start of deliveries, the goalpost was pushed closer later.
I’ll be convinced they are kicking ass when the Model 3 is shipping in promised volumes and there is no other competitor in sight. Getting 0-60 times through the application of inherit properties of electric motors doesn’t count.
> by constantly kicking ass technologically -- improving the products way outside of what competitors believed was even possible... by iterating crazy fast on their ideas -- something that conventional car companies will not be able to do.
Since you're so keen to bag on those dopey conventional car industries and their inferior practices and dumbass managers, explain to me why Tesla, who have in your assessment, have successfully proven their kick-ass technology and superior processes, have been chronically terrible at meeting quarterly production estimates? Is industrial engineering and optimization just too mundane for the exemplars at Tesla?
A counter argument is that tesla is a conventional business that is packaged by Elon musks masterful salesmanship as a one of a kind company where normal rules don't apply. At my old company Martin shkreli pitched to us a few times, and Elon uses some similar reality distortion tricks to excite investors.
For tesla, that is necessary, because no rational investor would invest in an electric car startup. But if you can get investors excited enough about some vague but very promising future, they will overlook short term failures and be guided less by fact than belief
I guess this "conventional" thinking was due to the fact that electric car startups had bad history of not delivering.
Tesla excites investors because they have history of not only delivering but also exceeding expectations. I think as long as they keep delivering on those expectations, they will be immune to conventional valuation methods.
How many Model 3 cars were supposed to be delivered by now? 5000 per month? Or something?
The company, instead of working out its issues with the Model 3, hype up the Tesla Semi and Tesla Roadster, in hopes that people forget about its Model 3 issues. This is a company that's tilting way more in the "hopes and dreams" category than any actual, physical deliveries.
Agreed, and this is where it can get messy. Distracting investors from bad news to buy your company more time to accomplish hard goals is one thing, and a necessary evil that many companies (big and small) face from time to time. But when this practice becomes a regular thing because execution continues to fall short of promises, you fall down a slippery slope where perception matters more than reality
this is a large part of what happened with theranos
> Tesla excites investors because they have history of not only delivering but also exceeding expectations. I think as long as they keep delivering on those expectations, they will be immune to conventional valuation methods.
Certainly not on their production numbers versus promises from Elon.
My understanding is Tesla is development process company focused on learning and iterating with the production being only by-product of that process, necessary to keep the promise of greateness alive and also to support the learning process.
My experience, it is neigh impossible to really learn without delivering the product, but you can learn without bringing in profit.
>> development process company focused on learning and iterating with the production being only by-product
That's not a company you're describing, that's a research lab. Either they win big by discovering some revolutionary tech that they can patent and sublicense to the established car manufacturers or they go down, because there is only so much people willing to invest their money in a dream.
>After all, even if Tesla stock goes to zero, and its bonds default to pennies-on-the-dollar, its factories and software repositories and human capital will all be there, and no Chapter 11 court or committee will be blind to the fact that they’re worth far more as a coherent unit than they would be as separate assets.
Well, to me that statement seems to be at least dubious. If the company is loosing money and goes bankrupt it is obviously not worth something in its entirety - at least in its current form. (And I highly doubt that simply restructuring Tesla would do something about that.)
This does however not neglect the premise of the article. Even if Tesla would no longer exist in any form, there has been some creation of value for society as a whole.
regarding human capital, when a company goes bankrupt many employees lose their jobs.
the current stock price takes into account all those variables. When a bankrupt stock goes to near zero, that takes into account totality of all the intellectual property, factories, etc.
Tesla going bankrupt wouldn’t be an isolated event. It would probably be something like the aol-time Warner merger or the Lehman Brothers bankruptcy and trigger a general market correction.
> Well, to me that statement seems to be at least dubious. If the company is loosing money and goes bankrupt it is obviously not worth something in its entirety - at least in its current form. (And I highly doubt that simply restructuring Tesla would do something about that.)
Bankruptcy means the company has more debt obligations than assets, and has ran out of cash. It does not mean the company assets are worth nothing.
In a theoretical Chapter 11, Tesla Energy and the "battery factory" would still be worth many billions, even if they never sold another car.
Tesla is doing pretty good for a highly capital intensive and growing company.
Does techcrunch not realize the gravity of publishing an article with such a false and misleading headline pertaining to solvency of a company? They could get sued..imagine such an article were released during market hours. Many traders and bots make decisions on headlines.
when I saw the headline, I immediately did a google search to confirm if Tesla actually went bankrupt. Obv. it didn't. Occasionally, companies go bankrupt overnight, with little forewarning. One such example is Gtat, which filed bankruptcy overnight after disclosing the loss of an Apple contract. I'm amazed the editors would allow such a headline considering the potential seriousness of making misleading statements about public companies, where billions of dollars are at stake.
What If put up a headline "company X is bankrupt" and then the article continues "bankrupt in ethics..gotcha"
Newspapers are afraid of criticizing Tesla because its a litigious company and they have nothing substantial to suport the hot air baloon they became - any credible criticism and all this BS pyramid is falling apart.
So the risk that they will attack anybody writing something not favorable is quite high.
On the other side, does anybody sue CEOs for talking BS and using clever tricks to hide the truth, or making new promises without delivering on the previous ones?
Sometimes the traders trading on headlines are smart and are counting on less smart people to act on the headline a bit later. By the way I don't think that techcrunch article will effect anything much. It's a bit dumb - a bankrupt Tesla wouldn't leave functional assets in the same way that the channel tunnel did for example.
I never thought I'd read a TechCrunch article which puts into question the integrity of the entire capitalist system...
This is very different from the typical capitalist rhetoric that if you're smart and work hard in ways that benefit society, you'll be personally rewarded. Now it seems that the conditions for success are extremely ambiguous.
Bankruptcy is essentially a hack on the system and to now pretend that it's a normal part of an efficient capitalist society is quite outrageous.
If it were real capitalism, there would be no bankruptcy, you'd have to work to pay back every penny for the rest of your life. I'd prefer that. Because otherwise you're just encouraging people to take risks using other people's money.
Investing in ambitious companies that could lose everything or make a fortune is the name of the (venture) capitalist game
Also, bankruptcy is not a "hack", it is a legal process to protect creditors / vendors / employees as well as companies. while there is a widespread belief, encouraged by politicians post financial crisis, that companies use bankruptcy as a way to protect themselves from risk, that is incorrect. Bankruptcy is a legal process for dividing up a failed companies assets so that it is not a free for all. It protects employees by preventing powerful creditors from forcefully claiming value until other constituents get paid in accordance with the legal statues of the process
It costs almost $0 for an engineer to build software and yet VCs have somehow managed to artificially raise the barrier to entry and got huge paychecks for themselves in the process.
If VCs did not exist, I'm certain that we would have all the software, websites and apps that we have today except that it would have cost society much less to get to that point... Also maybe these apps and websites wouldn't be the terrible morally bankrupt profit machines they are today.
"If VCs did not exist, I'm certain that we would have all the software, websites and apps that we have today except that it would have cost society much less to get to that point... Also maybe these apps and websites wouldn't be as terrible for society as they are today."
That is quite a bold opinion, presented without any evidence at all. And my opinion is that is the opposite of true. For what you said to be true, not only would server / hosting / infrastructure costs need to be zero, but hundreds of thousands of people would have to decide to work 60 hours a week for free
It does not cost an engineer $0 to build software. Tell an engineer you think his / her time is worth zero and see what response you get
There are plenty of bootstrapped companies which managed to pay the hosting costs just fine. In fact it's better because it forces companies to prove their model while they're still small before they become a huge systemic risk to all of society.
Yeah because VC money drove up the price of online advertising to insane levels which bootstrapped companies could no longer compete with and then they hoarded up all the blogs with constant streams of articles... There was a long period when VCs essentially owned all the popular tech blogs. Bloggers would not dare to cover any product which was not backed by VC money for fear that it would ruin their future prospects.
In effect, VCs used their money to gain a monopoly on user attention and this killed off a LOT of bootstrapped companies which would otherwise have strived.
Tesla looks like Elon's attempt at running a high-stakes Amazon-for-batteries type business where they invest all they get into the business and get massive adoption in the long run. Except for a much much more capital intensive industry, and where so far more than a couple of things have gone wrong.
At the moment they're in a very tough spot where they've issued bonds, folded Solar City into Tesla in a weird attempt at bad accounting and pretended like (already 3) new product lines were ready to take in pre-order money. Meanwhile they're using excess battery production capacity not being used for cars (which are stuck in slow production lines) for a quick (small) buck in Australia and Puerto Rico.
I think we're going to see either a secondary offer or new bonds being issued soon.
I mean this as nicely as possible: armchair speculation like this doesn't make sense to me. You're insinuating you'd be a better decision maker than an entire team of lawyers, executives, and accountants at a fairly prestigious place to work. Describing things as "bad accounting" or suggesting they're trying to make a "quick buck" just makes it seem like you lack the awareness to realize that you probably don't have all the information and haven't spent the same amount of time and effort in decision making as the executives at Tesla. You're not some lost genius in a world full of idiots. People are generally rationale actors, and the people working at Tesla seem pretty smart to me.
The typo in your last sentence (“rationale” where you mean “rational”) actually makes it more accurate. It’s possible to rationalize anything. Read history — maybe something by Halberstam — smart people can be very wrong. Groups of smart people, even.
Disclosure: I have no opinion on Tesla’s financials. Everything might be fine. I have negative opinions about their cars. I do like SpaceX, and I like the people I’ve met at SpaceX.
Actually not. The smart people described are all executives (experts) at Tesla. Their interests are therefore aligned, not individuals acting in their own self-interest in the marketplace.
> You're insinuating you'd be a better decision maker than an entire team of lawyers, executives, and accountants at a fairly prestigious place to work.
And you're assuming that top-tier people at a company are able to make rational and optimal decisions when their livelihoods depends on the perceived survival and success of their company.
Have you really looked into this? How much would it cost Tesla in the long term to let someone else manufacture their cars? How would this impact their long term profitability? Would their competitors even be willing to do this? What kind of terms could they manage to negotiate? How much of a risk is it to let someone else have a stranglehold on your manufacturing?
I don't understand sweeping opinions like this when you have no idea what you're talking about.
From a quick look at their balance sheet, in the past year their total assets have increased from $12 billion to $28 billion, and debt from $2 billion to $9 billion, for an increase in net assets of $9 billion. Cash flow is fine too; total cash is up almost half a billion over the past year, for a total of $3.5B.
Looking at their cash flow statement, they are spending a lot but mostly on capital expenditures.
I don't see any reason to even think about bankruptcy. They're doing fine.
Those financial statements are not in the article and that's a shame. I would expect journalists writing about the potential bankruptcy of a company to give more numbers and less "maybe"s (word used 5 times in the article).
The point of the article (as I understood) was precisely to explore every other angle except for the financial statement (since that's what every other article about TSLA covers).
It's an opinion piece, not journalistic reporting -- the thesis isn't "Tesla is going to go bankrupt and here's why," but rather "here's why I don't think it matters whether Tesla goes bankrupt." It'd arguably be nice to have a sentence or two about "of course, they may not be in trouble after all," but it doesn't really affect the author's argument.
I don't think this is really written for folks who are bullish on Tesla, anyway. It's written for critics, and for folks like myself who might describe themselves as "fascinated skeptics."
Right now, their pp&e and working capital seem like they could be liquidated to pay back debt, so agree that bankruptcy doesn't seem to be a near term concern.
However I don't know what covenants are in those loan documents, and its possible that given the delays tesla could trip a covenant and get in trouble with lenders. Though I'm sure Elon has worked his magic on them as well
Hard to say if they're doing fine at this point, as the model 3 doesn't really show up in the financials yet. The real concern is that model 3 production capacity increases without sufficiently decreasing production efficiency. So revenue goes up but COGS skyrockets, and the business is structurally not profitable on even a gross profit basis. This would lead to huge financing needs, and also probably a drop in the stock price (though the stock price seems immune to dropping). This could lead to company failure and is not a theoretical risk
Sure, if they end up selling the Model 3 at a loss they'll be in trouble, but I don't see any particular reason to think that'll happen. And most likely they'll be fine with lenders as long as they make the payments, which so far they seem perfectly able to do.
I don't know teslas model 3 unit production costs, but if you look at cost curves for other car companies as they scale up manufacturing, and take into account all the fixed costs and manual processes currently used in production of a small number of model 3s, the unit cost is probably massively high. Historically you can reduce those costs by 80%+ as you scale, so it is possible tesla can produce profitably.
On the other hand, tesla set the price for its car before it started making it. So it's entirely possible that they were underestimating the cost / complexity of the manufacturing process and that they simply can't support their cost base with that price. Again, this is a hypothetical, but real concern
More likely is they get there, but takes longer / more money than expected. And in a competitive world, that can be catastrophic
We don't know which of these hypothetical scenarios will play out, so we must assess the likelihood that each happens and value the company that way. Current valuation suggests probabikty of success is very very high and value of success is very large; id argue that both those numbers should be lower
Well they haven't profited off the Model S and Model X, and those are $100k vehicles. Is that not a reason to lose money on the Model 3? I suspect they'll make money selling the $50k Model 3s they're starting with, but the $35k base is going to be a stretch.
> could trip a covenant and get in trouble with lenders
Lenders usually don't exercise their covenants willy-nilly because doing so is a good way to end up with less money than you started with.
Most covenants are written broadly, in a way to let lenders recapture some of their principal in the event the corporation is indeed on the way to bankruptcy.
Specific example: company is floundering, throwing their remaining cash into a losing business. Lenders might prefer to trigger covenants, take them to bankruptcy, and liquidate and receive 60 cents on the dollar, rather than wait and receive less later on.
But if the lenders think the business is doing fine and they will eventually get repaid, the covenants are more of a negotiating position rather than a real threat.
Of course all this changes if the debt changes hands and, say, a hostile entity gets a controlling share -- but that's what finance departments are supposed to look out for.
agreed, by "get in trouble" i meant that lenders could threaten to renegotiate terms or influence the company's strategy. but i am sure elon / tesla have good relationships with the debtholders so this probably wouldnt happen until after a million other worse things go wrong
technically, if they liquidated their PP&E and repaid all of their debt, they could not go bankrupt as bankruptcy is a process specific to companies with debt. but yes, if this happens the company is gone
if things start looking really bad, debtholders and equity holders will start clamoring for a change in strategy to preserve their assets. likely they would push to bring in new management to fix manufacturing issues, push for tesla to sell itself, or push for tesla to divest certain parts of its business, or some combination of the above
given how valuable tesla is, for anyone to want to buy them in whole or in part would require a massive drop in their stock price, so stock investors would probably be wiped out long before any bankruptcy proceedings started
Their Model S/X and battery divisions are profitable, so I guess they need to slow down Model 3 ramp-up (and future products) substantially, but they wouldn't go bankrupt.
Another problem that can happen though is interest rates going up, which makes leasing much harder. Most of the buyers/leasers depend on these low interest rates I'm afraid.
_If_ they are still performing as they are now when that happens, they will be in trouble. They predict to have a healthy cash flow from the model 3 soon, though. 5000 cars a week at the end of Q1 2018 would bring in at least $175M a week on income or, ballpark, in the range of a billion a year in margins. I don’t think that would be enough to warrant their share price, but it would be enough to keep the company running.
(minor negative: $1000 of the money paid for each model 3 sold already is in their bank account)
They also get 1000$ from future model 3's before they are built, which reduces the impact. It's effectively a zero intrest loan and market validation, though eventually they are going to run out of customers willing to front that money.
It’s funny to see everyone praise Amazon’s strategy of “invest everything you possibly can regardless of what the income statement looks like in the short-term. Tesla does the same thing and all anyone can say is “look at the income statement!”
Granted there are some differences, but the strategy is the same.
Except Tesla is almost never cash flow positive on an operating basis, while Amazon almost always has been. Tesla is financing their expansion (in addition to covering past loses) with new cash infusions, while Amazon financed their expansion with actual profits. Justifying Tesla losing money because of Amazon is a complete false equivalence.
I can't help but view Tesla as an ongoing kickstarter. This was made even more apparent in their latest unveiling. I say this as a fan of their vision, mission and current product offering.
I see Tesla as a conduit for the wealthy to keep subsidising the technology for the middle class. In the same way that Uber is a way for the wealthy to pay for the commute of the middle class (cos let’s face it the poor aren’t taking cabs or buying EVs). For the sake of the community we need these vehicles of wealth transfer to keep existing.
The moment companies like Uber and Tesla start making money, we need the visionaries to come in and start producing ever better products and services for ever collapsing prices.
But that is the issue. They aren't selling enough cars to keep things going. Instead they tap capital, which is largely funded by the middle class. So it isn't the wealthy subsidising anything.
What? Did you actually look at their cash flows? They are massively free cash flow negative, and it's only getting more negative every quarter. The only reason cash is up is because they regularly tap the capital markets with debt and equity, which is why Elon is constantly looking for new ways to boost the stock.
The only way Tesla avoids bankruptcy is if the markets keep believing in the Elon magic, because the operations are definitely not financing the investment required.
This is the key thing people miss when people falsely compare Tesla to Amazon. Amazon has always been free cash flow positive. They may never have turned a GAAP profit for many years, but they weren't issuing stock to finance their growth.
That's a complete misreading of Amazon. Their entire competitive advantage is having really cheap capital which enables unbelievable capital investment. First it was in distribution centers (3PL), then servers (AWS), and next likely be parcel delivery (look out FedEx). The e-commerce business is the first and best customer of each of these services, but they're basically a conglomerate of capital intensive low margin infrastructure services.
^ Why was this down-voted? This analysis is correct.
Tesla is on track to burn >$500m/quarter going forward and will once again have to access capital markets in 2018. Junk bond markets have been puking for the past 3 months, so that option probably is getting less likely. That leaves equity dilution. Not good for current shareholders. http://archive.fast-edgar.com//20171103/APA8Q22CZM22D262222M...
A lot of the "Assets" noted on the balance sheet are the reservation costs for all of Tesla and Solar City's promised products. Tesla recently laid off a significant portion of their workforce at the Model 3 factory. Output was much lower than they had guided to for the quarter. It doesn't look like that's going to change soon. If customers start demanding refunds a lot of the assets listed on the balance sheet go away.
The liabilities on the other hand, won't be going anywhere.
People can insist that Tesla is effecting some positive changes in the world, but it seems to me that mostly they have been good at repackaging and reselling the tech of other companies in creative ways.
> People can insist that Tesla is effecting some positive changes in the world, but it seems to me that mostly they have been good at repackaging and reselling the tech of other companies in creative ways.
I've seen this critique leveled at Apple and it makes more sense there (the Mac borrowing heavily from stuff they witnessed at Xerox PARC and the original iPhone just doing what a lot of other phones at the time were doing, except simpler and more mass-adoptable), but what evidence do you have for this applying to Tesla? Even if you admit that battery technology improvements that made EVs viable were implemented elsewhere, the entire automotive industry was 100% behind the combustion engine before Tesla, and now almost every car company is building EVs. This isn't merely Tesla effecting "positive change in the world", they proved that EVs were manufacturable, that the public wanted it, and solved numerous obstacles to actually bring it to market. The EV would literally not exist (to the public) in 2017 if not for Tesla. How is that merely repackaging tech?
People who level that critique at Apple are the equivalent of sports fans of rivals to the Yankees constantly talking trash about the Yankees. That is, it may make fans of Apple angry (and it did all throughout the 90s and 00s) but it had no impact on the fundamentals of Apple's business. While people were leveling that critique against Apple, Apple was selling millions of iMacs, then hundreds of millions of iPods, and now over a billion iPhones. Now I would say it's extremely shallow analysis of Apple as a business to say they were just repackaging tech (you don't do hundreds of billions of dollars in revenue over the past 20 years if you aren't actually innovating [EDIT: actually iOS devices alone have done almost a trillion in revenue], especially if you don't have a monopoly in the relevant markets).
Tesla is not Apple though. In order for the analogy to Apple to work, Tesla would have to be shipping a massive amount of EVs (and a growing amount as well) while they were being criticized. They haven't. In fact the penetration of EVs as a % of all cars sold is single digits.
If you want to take the perspective of the author of the article, then we can at least say that Tesla may have induced rival car makers to at least get interested in EVs and demonstrated a small market exists for them, but it's not clear that once every automaker begins shipping EVs at scale that it's going to replace non-EVs in the market in a significant way. What if EVs just top out at 20%?
On another level it's kind of a silly perspective to take because real people have invested their money in Tesla. A lot of them might be rich tech workers who no one will shed tears for, but big institutional investors like Fidelity own significant stakes in Tesla, and they're managing 401ks for regular people.
I don't think too many investors who invested in telecom companies during the tech bubble took comfort in the fact that at least society was left with a lot of fiber and infrastructure.
What would Tesla even leave behind anyway? The only thing I can think of is the battery factory which hopefully would be able to produce batteries for other manufacturers. But even that is not clear to me since China is pouring billions into doing that as well (and they're going to have a lower cost of capital compared to some private entity without state backing).
> The EV would literally not exist (to the public) in 2017 if not for Tesla.
According to wikipedia a rather well known EV Nissan Leaf predates Tesla Model S by 2 years. First hybrid Toyota Prius is 20 years old. Toyota had concepts of plug-in hybrids for quite some time. Countless local teams make electric swaps. We had electric golf cars and what not for quite some time.
What Tesla more or less pioneered is premium class performance EV and proved that there is market in this segment. They proved that not only "convenient home-work-home trip" (free parking, bus lanes, subsidies) can be market for EVs.
Semi-random historical aside, one of the original founders of Tesla (no longer at the company) makes the claim that Al Gore "invented" the Prius by featuring the work of some academics on hybrid engines in a televised hearing. Although ignored by the American companies he was trying to convince, Toyota ran with the idea.
>If customers start demanding refunds a lot of the assets listed on the balance sheet go away.
I know a lot of people who reserved their model-3 paying the deposit. Pretty much they all know that their deliveries are going to be delayed but still put up the deposit. They just don't want to cancel their reservation and lose their spot as long as they get their car.
I think once Tesla's battery problems are resolved and start delivering the model-3s, they should see the cash flowing.
Characterizing negative cashflows from investment as 'burn'
is incredibly disingenuous. The cashflows from any capital intensive startup would look similar. The cashflows from operation are negative, but not egregiously so. In fact, they are probably dragged down by the increased headcount associated with unreleased products. If Tesla had decided to stop with the model S and X, they'd likely be profitable right now.
Your description of their assets is also off. Customer deposits have NO net effect on their balance sheet/equity value. They very clearly have a liability of $686 million to cancel out the cash received.
Tesla's cash flow from investment was -$1.21B last quarter alone. I can scarcely think of a startup that consumed cash at this rate. That's an annualized rate of -$4.84B. Not even the pets.com or Webvans of the world ever reached this level of "cash burn." Cash flow from operations were -$300.56M last quarter, and losses were $671.16M. Annualized, this puts them at around -$1.2B and -$2.68B per year respectively.
If this is due to excess headcount from unreleased products, I say that's crazy and they should stop attempting those unreleased products.
Sure, the absolute numbers are large. But in percent terms of market cap, they are far more reasonable. To put them in perspective another way, Tesla has around 450k net reservations for the model 3. Even if half of those people cancel, and everyone buys the base unit with no add-ons, that is nearly $8 billion of revenue. I have no idea what acceptable ratios of plant/equipment to revenue are, but that doesn't seem absurd if they can fulfill those orders in 2-3 years and amortize the equipment over 15-30 years.
I'm not going to necessarily make the argument that Tesla's share price is rational, but I do think this spending is good for shareholders. The balance sheet equity is a pittance compared to market cap. People are betting on large future profits. And there is just no way the level of production they are currently at could earn enough to justify the price. They have to grow. To grow they have to invest. It's just the nature of the business they are in. I think being in tech gives people the idea that you can create enormous value without capital risk, but that just isn't reality in most of the physical world. I think they are at least being responsible about it. They went out and established there was substantial interest for the 3 prior to undertaking all of this - something Ford didn't do for the Edsel, which in terms of financial sins would be on par with this failing.
To get back to the initial point here, I do think the amount of debt they are using might be a bit on the high side if you consider their current and not future revenue, but the capital markets have shown a huge willingness to stomach secondary offerings of the stock, so it seems like they can and probably will remedy that.
Your argument is a long winded way of saying: The market believes in Tesla, so any and all losses are acceptable. Look, at $671M in losses per quarter, nothing about this company suggest it is viable. Worse, the "cash burn" rate, or negative free cash flow, is an even more astounding -$1.55B per quarter. That annualizes to $6.2B per year! That's how much the capital markets have to fund the company to sustain it going forward. If it wasn't for its high market cap, the company would have folded long ago for lack of funds.
It's pretty obvious that current losses like these could easily overcome a decade-plus of future profits. Their debt is already rated a junk bond, so they aren't going to get any good deals on future debt. At some point, you would think, surely rationality will set in. I mean, Tesla is not the only EV manufacture in the world. Wouldn't it make more sense to invest in another car company that is also making EVs, and have finances that look much more appealing? Why would anyone subsidize a company just to produce a product that others can easily replicate? At some point, this has to stop.
> Why would anyone subsidize a company just to produce a product that others can easily replicate
Because you, and I think a lot of people, think Tesla is a car company. It's not; Tesla is becoming a battery company and a charging station company. That will make them as big as gas companies, because everyone will be needing both batteries and electricity, even if they need to offload their car business. Tesla will be far bigger than just cars for decades to come, and I think that's where a large part of shareholder trust is coming from.
I mean how many other EV charging networks are active?
No, the market believes in Tesla, and agrees that they should invest their earnings and new capital in building factories. Remove the capital investment and their losses are $570M for the year to date.
> If Tesla had decided to stop with the model S and X, they'd likely be profitable right now.
But they can't. A car manufacturer generally has to renew its models every ~10 years with an overall mid-life.
Tesla would be profitable if it had a net cashflow including these renewals. I'm not sure it's the case right now because it's difficult to differentiate between capex like building new assembly lines or R&D on core technologies and cost purely associated with the new models.
You're right, but (IMO) only looking at half of the whole.
Tesla is spending a lot. More than they earn. Whatever back-of-the-envelope profitability
model you attribute to their car making operation to differentiate marginal-operational from capital-investment costs, it does not add up to anything like enough to cover all costs. They cannot cover costs from free cash (as you say) which means they need capital coming in (as you say), debt and equity.
But, this doesn't mean they are selling elonmagic. No one would expect a car company to bootstrap, grow from cash flow. The place they expect to be is cash-hungry. This is what accountants are for, figuring out if a company is headed towards profitability when free cash flow is not an indicator.
The whole idea is that Tesla will be gradually capitalized to the point where it is like GM or Toyota.
Where elonmagic does come in is the same place startup-magic always comes in. It's novel in the auto industry. But, it's bread and butter on crunchbase (or here).
Does this company have the potential to create a large, high margin business. The accountant will have a harder time telling you this, and so will annual report readers. It's like answering the question Will Facebook manage to build an advertising business like Goog's? The answer turned out to be yes, so FB is worth a lot of money. Valuation of FB at IPO time was essentially the aggregate investor's answer to that question at that time.
Elonmagigic plays a big role in that 2nd part, unavoidably. This seems reasonable and to me.
Accounts are accounts. Sometimes the story is simple, and accoutns tell a simple story. Sometimes the real story is there, but takes context, digging and smart accountants to tell properly. Some important parts of the story are not in the accounts, like the fact the Tesla can apparently produce a faster supercar than anyone at 1/4 of the cost.
Most of the new financing is debt, which I referred to above. The new equity is only $472M for the first nine months of this year.
Their operating loss over the same period is $570M. As I also said, most of what they're spending is capital expenditure, amounting to about $3B.
I.e. the basic story here is simple: they're borrowing a bunch of money to build new factories, which is exactly what you would expect a new car company to do.
To be fair, Amazon issues shares to give to employees. The dilution is not huge but it’s real and helps to keep cash-flows positive and make the company look more profitable than it is.
Agreed. This is a R&D heavy venture, hence the capital expenditure is high too. How can one fail to capture the fact that their intellectual-property portfolio is a store of their value, as are the factories and the market lead they have not just in self-driving EVs but in batteries & solar tech. This is one of the dumbest articles I have read in a long while. Money spent on NOT money up in smoke. Somebody give this guy a crash course in corporate finance.
What market lead in self-driving EVs? Their lane-keep that occasionally veers out of the lane? The market leader in self-driving EVs is Cruise, and if you take away your EV qualifier, it's Waymo.
The NUMMI factory is worth little. Automakers are unlikely to want to repurchase a CA factory due to all the regulations they would have to deal with.
What solar tech? Solar City was an installation company, which Tesla bailed out and has been winding down. The solar freaking roof thing doesn't even exist yet--Tesla's reveal was a bunch of fake solar shingles.
People will very generously give Tesla all kinds of benefit of the doubt, but these people might soon realize they don't know what they're talking about.
If you think they're fine, maybe look at cash flows a little closer.
Cash flow is up half a billion because they just issued 1.8 billion in junk bonds (which are already trading in minus territory btw). Meanwhile operating cash flows are increasingly negative to the tune of hundreds of millions per quarter.
Sure, they're fine if they continue to raise billions. But they're nowhere near profitable, and they're also going to continue to lose billions. What's going to happen if they receive a credit downgrade or institutional investors decide to stop playing along?
just because they earn money ,doesnt mean it's their main goal. a lot of IT companies who are HUGE didnt even have a model to earn money. they just got a lot of it because they made something that was wanted by a lot of people.
One substantial possible factor in Tesla's bankruptcy is competition. You suddenly now deal with car manufacturers which are woken up to the electric drive age.
Thought exercise: how can competition take serious levels while Tesla produces half or more of the world's battery capacity?
> You suddenly now deal with car manufacturers which are woken up to the electric drive age.
This keeps getting repeated, but all I see are some meagre efforts which seem primarily focussed on headlines rather than actually delivering mass-scale EVs. Concepts. Demonstrators. The closest any of them have come is the Bolt (which is limited in availability, and their dealer networks regularly push people away from buying), and the Leaf (which until the most recent model still looked far too much like a golf buggy and had very limited range).
These are large companies with massive departments used to pushing out new vehicle models every year and updating production lines to suit.
I'm still yet to hear of any of the major manufacturers sign contracts for large scale battery deliveries to support any mass EV production.
I don't understand why their outlook is always 2019-2020-2025-2030 for their full EV range unless they're just hoping for Tesla to fail and finally be able to point out and say "See, EV doesn't work!" so they can go back to what they've been doing for a long while.
Exactly my point. They can design an electric car just fine, they can produce an electric car sans battery just fine, they can sell them just fine.
They can't setup scale-up battery production sites within years. That's why serious competition from traditional car manufacturers won't happen anytime before 2022.
Chinese producers are a different story. They have the government behind them for resourcing (Lithium and Cobalt). I see Chinese manufacturers as the most serious possible competition. However, it's not unlikely the government will not allow exporting of electric vehicles on a mass scale since they will want to use them theirselves.
Anybody listened to one recent conf call with Musk ? it was on youtube.
He seems to be in some good sht (subpar assembly line for the batteries and/or engine having to be reassembled from scratch which is done according to him) so so far this particular problem is not out of control for Tesla, but then time is critical too, competition is ramping up, and laws are shifting (EV tax cut is gone now I believe).
I like Musk approach of going legacy free to stretch the limits of the current model, as he did for SpaceX. I'd be sad if Tesla choked enough to crash. If he just made it to the model 3 production that would be "cool".
I don't know how people in the know understand the recent Semi/Roadster unveiling, is it distraction to get some buzz or a final scheme to finance the model3 step with easier things to be done in 2020 (smaller market for Semi and I believe a litle less complex to build than a cramped 4 seater)
EV tax cuts are not gone. Some versions of the tax bill proposed to remove the federal tax credits. Also Tesla will reach the 200,000 threshold of cars sold where the credit starts to phase out. But there are still state incentives.
Check out the book Doing Capitalism In The Innovation Economy for a defense of the government encouraging exactly this sort of thing. I reviewed it on Amazon here: https://www.amazon.com/review/R2SCHS5SXNDF30.
Point being, we want exactly this sort of thing, but it's foolish to expect the market to make this sort of investment very often.
We should not forget, that bad press about tesla is in the interest of Jim Chanos, who is a billionaire and has a big short against tesla. If Tesla stock falls, he wins. Since he holds this short position, he is in the press once a month.
On the other hand, good press about tesla is in the interest of Elon musk and tesla shareholders. Wars between bulls and bears on controversial stocks are waged largely in the press
What if, Tesla is simply a Silicon Valley startup, and the endgame is to get one of the Big Three to acquire them so they don't have to worry about their day-to-day finances?
>Jim Chanos summarized all of the reasons why nicely: “If you wouldn’t be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes.”
A major box it doesn't tick from a short sellers perspective is the "make something people want" thing. Loads of people want it's cars and would be trucks. The main question is can they deliver them but I'd be wary being short in case they can.
I've made money in the past buying out of the money call options on TSLA, I'm guessing all those short sellers buying butterflies.
That said, the point that sticks out at me in the article is this one -- "... because money is how we measure success. And this is in fact true of most companies. But it is not true of Tesla. 'When a measure becomes a target, it ceases to be a good measure,' and this is as true of money as it is of any other measure. The purpose of Tesla is not to make money;"
There is a tremendous amount of visibility put on the company, and Elon is up front about what they are trying to achieve. The arguments against them succeeding boil down to either 'we don't believe you can do what you say you can do.' or 'we don't understand why you are doing what you're doing, so it must be wrong.'
It used to really bug me when someone told me that what I was proposing was impossible. I work to do the necessary research and foundation work to understand the risks and challenges of a course of action and someone says "Well, I've never heard of anyone who could do that so you clearly are missing something." No discussion of the idea, no attempt to understand how I came to believe what I did.
One of the things I admire in Elon is that he seems really good at just completely ignoring that noise. It is something I have tried to cultivate as it is helpful in starting new businesses or projects to be able to not get bogged down by people who want to tell you why you are wrong and are unwilling to listen to how you think you may be right.
This is not investment advice! I'm just explaining how it works ...
These days they have gone a bit crazy but it works like this, I would buy Jan '19 call options that are out of the money[1]. Looking at some that are 'fairly close' (closed at $315, options at $320). They are selling for about $55 [ibid]. So you buy a contract (100 shares) which costs you $5,500. Now if TSLA goes up during 2018 people will want to buy those calls from you for more than $55. Of course if TSLA goes down, or stays down all year then come January 19 you can either buy your 100 shares for an additional $32,000 (which you won't since you would lose money on that deal) or let the call expire in which case the person who sold the option keeps the shares and the $5,500 you spent.
But here is the fun part, if TSLA goes up 10% (315 -> 346), now your calls are "in the money by $31", and if you look at calls in 2019 that are in the money for $30[2] you see they are trading around $69. Which if you sold your contract for that would get you $6,900 or a gain of 25%.
Compared to the alternative of buying 18 shares at 315 for $5,670, and selling them when they went up 10% to 346 at $6,228 for a 10% gain.
Buying actual shares is the safer way to go because if you buy a call option you lose the entire $5,500 if the stock doesn't go up above the strike price! Buying the call options gives you an opportunity to leverage the volatility for a higher return.
I've observed there is a lot of 'passion' investing (rather than say reasonable investing) in TSLA where people buy it regardless and so it defies gravity and goes up anyway.
TL;DR higher risk for a chance at higher return or a 100% loss. Fair enough I guess.
There's even more passion / panic investing and selling in cryptocurrencies at the moment. I think both Tesla and crypto are areas where a lot of people think they know a lot about, or are passionate about, and they go for that.
The idea that stocks exist for some investors to get rich is utterly silly.
Stocks exist to trick investors into funding someone elses ideas that they wouldn't fund otherwise by selling them casino chips that they can use to gamble among themselves.
The only reason the company should be concerned about their share price would be that they want to issue more and they'd like to get as much money for them as possible.
The law that makes boards care about value for investors is the most ignorant thing ever written.
> Maybe; maybe not. Either way, a far more interesting question, if (like me) you have no financial interest in the business’s success or failure, is: does it matter?
If you're an American, it does matter in the sense that the subsidies that allow Tesla to keep moonshotting with relative comfort are paid through your tax dollars [0]. Tax dollars that could either go back to your pocket, or otherwise indirectly benefit you by subsidizing a more effective venture. Hell, some of those tax dollars could even be used to help the original moonshot institution.
I think what Tesla and Musk are doing is very cool. But let's face it, lots of companies and individuals could promise cool things if they had a multi-billion cushion. I think the OP makes some decent points about how silly it is to care about immediate or substantial profit margins -- hell, any investor in Amazon would agree with that.
But it seems dangerously naive to just think this:
> But it is not true of Tesla. “When a measure becomes a target, it ceases to be a good measure,” and this is as true of money as it is of any other measure. The purpose of Tesla is not to make money; it is to pioneer fleets of smart mass-market electric cars, and the infrastructure to support them, and battery technology which is not limited to cars. Making money is ancillary.
That is the claimed purpose of Tesla. The author is confusing Tesla's self-interested claims with reality -- this is basically Kool-Aid-drinking-cultism. And giving Tesla and Musk the complete benefit of the doubt in terms of altruism, that doesn't mean that their positive dreaming has an infinite buffer against shitty implementation and business practices. Profit is definitely not everything, but it's a potentially very useful signal (among others) to weed out non-performance and incompetence.
Tesla's primary method of financing is through debt and equity, not through any government subsidy.
Yes they get ZEV credits, but the revenue from those pales in comparison to their sales, loans, and stock offerings.
Not to mention that most of the traditional car manufacturers in America received huge government bailouts to stay afloat in 2008, so even if you slight Tesla for receiving a loan (which they repaid early with interest) they are still on equal footing with other manufacturers.
Was going to say exactly this. Without the $7500 tax credit, the Model 3 immediately shoots out of reach for a large number of people who want to buy one. Same for solar roofs - without the tax credits, it takes way longer to pay for panels than most people are willing to wait. All the Elon companies depend heavily on government subsidies, whether corporate or consumer, for their success.
Yes, you're right, it is unfair to not consider the many subsidies that entrenched companies (automotive or otherwise) have received and currently receive. If the LAT were to count up the ones for GM using the same standard they did for Tesla, it may very well end up being a similar magnitude of subsidy.
So I suppose the main thing GM and such companies have going for them is that they have a track record of being profitable and they would likely have a stronger chance of remaining profitable sans subsidies than Tesla. But I realize that argument is basically begging the question, if not an outright tautology (Wealthy companies are wealthy).
Furthermore, it's not at all destined that if Tesla got into a failing situation that U.S. politicians would feel an obligation to keep pumping them up, or to bail them out, especially in an Trump administration. And Tesla can hardly be blamed for taking advantage of publicized subsidies, it's no less sneaky than the way entrenched companies have taken advantage of those subsidies for decades, nevermind tax loopholes and shelters.
So I'll weaken my argument to this: Tesla's inability to make money is not, as the OP suggests, a non-issue for Americans. Tesla may be no different than any company in using tax credits and subsidies, but the fact remains that if Tesla fails -- a much more likely situation in terms of the near future than it is with most of the other car companies -- those tax credits/subsidies will have been greatly wasted. Because think about it: if Musk could effectively deliver on his technology ambitions -- I don't mean prototypes, but implementation and successful production -- in what likely economic scenario would a good-acting Tesla continue to be bleeding money?
In other words, at some point -- not this year, maybe not in the next 5 years, but also not never -- the lack of profit might be a signal that there is something fundamentally wrong with Tesla, either in its goals or in its internal workings. And claiming to have or actually having grand, life-improving ambitions means jack shit.
Would the OP have written this kind of piece of Theranos?
> those tax credits/subsidies will have been greatly wasted
No, for every ZEV credit or tax credit to the consumer, they sold a non-polluting electric car to the market. Even if the company disappears today, the cars will remain on the road.
Not a fan of giving sci-fi idealism a blank check. Moonshot is ok, that's how we got ICBMs and spy satellites, arguably necessary to keep a check on our enemies, though that is arguable these days. Roads and the Internet made even more sense. But, funding a for profit company with billions of tax money for sci-fi promises with unproven premises seems much more questionable.
The company's finances may be shaky, but electric cars aren't a "sci-fi promise with (an) unproven premise". The original Tesla Roadster came out in 2009 (or so), so there are 8-year old electric cars by Tesla driving around out there.
To throw so much money at the enterprise hinges on the assumption that electric cars can be a significant replacement for fossil fueled cars, and displace the electricity production (and other manufacturing costs) in such a way to be much more environmentally and economically viable. Just because we have a few (proportionally) working electric cars does not mean this vision is plausible. The original automobile did not need this kind of extrapolated justification, it was immediately obvious the car was much better than the wagon, and combined with the assembly line established a clear and very large market. I do not see this happening with the electric car.
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[ 3.2 ms ] story [ 208 ms ] threadA non financially viable incarnation of a mission driven business will not be able to further its cause compared to its longer lived version. At some point a reckoning will come and take away the path to your objective.
See the recent news about Etsy listing its way.
This just simply isn't true. Losing the money means they spent it and got nothing for it. But every penny they spend, they get a lot of things - battery technology, market share, mindshare, network effect lockins (superchargers), etc. Tesla isn't losing its money, its investing it.
Also,
> The purpose of Tesla is not to make money; it is to pioneer fleets of smart mass-market electric cars, and the infrastructure to support them, and battery technology which is not limited to cars. Making money is ancillary.
This is also false. It buys into Elon's marketing and it's false. The purpose of Tesla is to make money. Elon likes to say that it's not the money he is after, it's the faster pace of adoption for electric cars. But he also knows that the fastest way for this to happen is for Tesla to make money. The author is false. The purpose of Tesla is indeed to make money.
But they still do have losses.
Yes, and such things are reflected in their balance sheet under "Assets" and "Goodwill". The problem with Tesla is that after accounting for their "Assets" and "Goodwill", they're still negative.
Tesla says its "Goodwill" is worth $461,989,000 in 2016 for example. See its 2017 10k if you don't believe me (its in "thousands", so search for 461,989). http://ir.tesla.com/secfiling.cfm?filingID=1564590-17-3118&C...
The rest of Tesla's assets, which include every factory, every bit of cash, every investment... was estimated to be $ 692,925,000.
That is, Tesla believes itself to be a $1 Billion company, but roughly half of its valuation is "Goodwill" and brand recognition.
Believe it or not, Wall Street has names for the things you've described. Its all part of the calculation.
----------
Anyway, after accounting for all of that, Tesla is still losing money, quarter after quarter, year after year.
I guess the author has glanced over the billions of subsidies that come from taxpayers? [0] So ya, I think American taxpayers should care about Tesla's bankruptcy.
PS - The author of this article is the CTO of a company who's customer is, yup, you guessed it, Tesla. [1]
TC at it's finest folks.
[0] - http://www.latimes.com/business/la-fi-hy-musk-subsidies-2015...
[1] - https://happyfuncorp.com/case_studies/hfc-labs-making-tesla-...
It's really quite genius to build a really expensive solar roof tile when the tax breaks are for solar installations. Find a way to charge a premium price for a premium product (eg, a tile, not just a simple panel), get tax breaks for it all!
> HFC co-founders Ben Schippers and Will Schenk are both Tesla owners and wanted to levelup their driving experience, pushing the limits of the data being collected to help solve typical ownership problems that Tesla itself had not yet addressed and add a bit of fun.
Where is your source?
https://seekingalpha.com/article/4079749-nevada-demonstrates...
https://en.wikipedia.org/wiki/Gigafactory_1#State_competitio...
By even bringing up SpaceX you're trying to narrow the goalposts to something no one else is talking about.
As long as it's local not federal money I don't see the need to complain, because it's not my money.
However, locations are forced to play the game from network effects which push companies out of small communities. So, banning this behavior is likely to make things even worse for small town America. Still, getting rid of this might be better, but it's not as clear cut as you might think.
You can complain about corporate welfare but only complaining about one corporation isn't really fair. Walmart utilizes local police forces to skimp on internal security (not too mention using welfare to subsidize poor pay), Military companies relying on politicians literally stuffing their coffers while the Pentagon argues otherwise, resource extraction companies are given free permits to bleed the land dry, agricultural subsidies, 0% interest loans dictated through the Fed, the auto bailouts, the financial bailouts, propping up home prices through artificial means. The pattern seems to be taking tax dollars and giving them to corporations.
New York state is spending $750 million to build a solar panel factory in Buffalo for SolarCity. The San Mateo, Calif.-based company will lease the plant for $1 a year. It will not pay property taxes for a decade, which would otherwise total an estimated $260 million. The federal government also provides grants or tax credits to cover 30% of the cost of solar installations. SolarCity reported receiving $497.5 million in direct grants from the Treasury Department.
That figure, however, doesn't capture the full value of the government's support.
Since 2006, SolarCity has installed systems for 217,595 customers, according to a corporate filing. If each paid the current average price for a residential system — about $23,000, according to the Union of Concerned Scientists — the cost to the government would total about $1.5 billion, which would include the Treasury grants paid to SolarCity.
Nevada has agreed to provide Tesla with $1.3 billion in incentives to help build a massive battery factory near Reno.
The Palo Alto company has also collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. The tally also includes some federal environmental credits.
Thanks for your constructive reply btw.
Not saying subsidies of either type are good or bad... just saying that it's not reasonable to accuse Musk's companies of excessive reliance on public funding, while neglecting the beams in his competitors' eyes.
Tesla is not a conventional business. It is more of an edge case where you have to put your thinking hat to make sense of it.
This seems to be the exact kind of thinking that led to the dotcom bust.
I've commented before on the whole Tesla valuation thing, and people try to think of it like a tech company, and want to value it like a tech company. Tesla needs to actually produce things in a factory, deal with regulations and supply chain, which are very conventional business problems, and where the trouble is.
The faith is maintained in few ways:
- by constantly kicking ass technologically -- improving the products way outside of what competitors believed was even possible,
- by iterating crazy fast on their ideas -- something that conventional car companies will not be able to do. They won't be able to do because they would have to replace most of their management with people that are suited to this pace of change. Conventional car companies may flex muscles, but all their money will not be enough because the biggest problem doesn't lie in having the funds but in people. Funds are easy once you show you can do it, but getting the right people is much more difficult once you have large and established business.
- by showing they can maintain exponential growth until they are dominant force in the market.
A company that loses $1.5 Billion per quarter? Not even Amazon at "peak investment" had such horrible cash flow numbers.
There's very little value in a charity. If Tesla can't correct itself and actually start making money (or at very least: become a sustainable charity and prevent itself from losing money!!), then it simply has no future. It will eventually run out of cash and die.
That's the worry. If Tesla dies, then Tesla cars won't have anyone to take care of them, because Tesla's horrible model prevents 3rd parties from learning how to maintain a Tesla car.
Well, it's not exactly a startup anymore either, which is what it sounds like you're describing (escape velocity). They're a public company that has existed for some time. But like you say, really, it's valued on "faith."
None of their competitors have said anything Tesla has done is impossible, merely that it's been (and remains) unprofitable without crazy VC funding that Tesla is tapping into.
> by iterating crazy fast on their ideas -- something that conventional car companies will not be able to do
On the flipside - did you ever hear of conventional car companies with the kind of problems Tesla has, where they've overpromised/underdelivered on production rates by 20x - 30x? And they're stuck on elementary things like they don't know how to automate welding metal bits together?
> by showing they can maintain exponential growth until they are dominant force in the market
Can you show me the numbers supporting that claim? Tesla growth e.g. in number of vehicles sold from 2010 to 2016 isn't very different from the total automobile market in the US, which also grew almost 2x in the same period. If you look at it quarter by quarter, it's obviously linear growth for each of their models (Model S, Model X). And their total numbers for cars sold, revenue, income etc. remains at the sub-one-percent level as compared to GM, Ford etc.
Yes: https://truckyeah.jalopnik.com/why-wont-gm-deliver-its-huge-...
It is incredibly common for cars to have 3-4 month back orders. The Model 3 production is actually in-line with the original 'late 2017' start of deliveries, the goalpost was pushed closer later.
Since you're so keen to bag on those dopey conventional car industries and their inferior practices and dumbass managers, explain to me why Tesla, who have in your assessment, have successfully proven their kick-ass technology and superior processes, have been chronically terrible at meeting quarterly production estimates? Is industrial engineering and optimization just too mundane for the exemplars at Tesla?
For tesla, that is necessary, because no rational investor would invest in an electric car startup. But if you can get investors excited enough about some vague but very promising future, they will overlook short term failures and be guided less by fact than belief
Tesla excites investors because they have history of not only delivering but also exceeding expectations. I think as long as they keep delivering on those expectations, they will be immune to conventional valuation methods.
How many Model 3 cars were supposed to be delivered by now? 5000 per month? Or something?
The company, instead of working out its issues with the Model 3, hype up the Tesla Semi and Tesla Roadster, in hopes that people forget about its Model 3 issues. This is a company that's tilting way more in the "hopes and dreams" category than any actual, physical deliveries.
this is a large part of what happened with theranos
Certainly not on their production numbers versus promises from Elon.
Tesla is a car and battery manufacturer. That's a very conventional business.
My experience, it is neigh impossible to really learn without delivering the product, but you can learn without bringing in profit.
That's not a company you're describing, that's a research lab. Either they win big by discovering some revolutionary tech that they can patent and sublicense to the established car manufacturers or they go down, because there is only so much people willing to invest their money in a dream.
They burn through a lot of money and at some point either have to find more investment or make profits. They are not a research institution.
It is far too simplistic to imply that those that are a bit bearish on Tesla's prospects are simply not "wearing their thinking caps".
In the end, you can't discount what 'business people' think, because they're the ones on the other end of the table.
Well, to me that statement seems to be at least dubious. If the company is loosing money and goes bankrupt it is obviously not worth something in its entirety - at least in its current form. (And I highly doubt that simply restructuring Tesla would do something about that.)
This does however not neglect the premise of the article. Even if Tesla would no longer exist in any form, there has been some creation of value for society as a whole.
the current stock price takes into account all those variables. When a bankrupt stock goes to near zero, that takes into account totality of all the intellectual property, factories, etc.
Bankruptcy means the company has more debt obligations than assets, and has ran out of cash. It does not mean the company assets are worth nothing.
In a theoretical Chapter 11, Tesla Energy and the "battery factory" would still be worth many billions, even if they never sold another car.
Tesla is doing pretty good for a highly capital intensive and growing company.
Then came Tesla and now the fastest car is Tesla Roadster.
What If put up a headline "company X is bankrupt" and then the article continues "bankrupt in ethics..gotcha"
On the other side, does anybody sue CEOs for talking BS and using clever tricks to hide the truth, or making new promises without delivering on the previous ones?
Is it that easy to troll supposedly smart people and AI?
How is that anyone's fault but theirs? They should know and accept the risks of doing so. It's not like misleading clickbait is a new phenomenon.
This is very different from the typical capitalist rhetoric that if you're smart and work hard in ways that benefit society, you'll be personally rewarded. Now it seems that the conditions for success are extremely ambiguous.
Bankruptcy is essentially a hack on the system and to now pretend that it's a normal part of an efficient capitalist society is quite outrageous.
If it were real capitalism, there would be no bankruptcy, you'd have to work to pay back every penny for the rest of your life. I'd prefer that. Because otherwise you're just encouraging people to take risks using other people's money.
Also, bankruptcy is not a "hack", it is a legal process to protect creditors / vendors / employees as well as companies. while there is a widespread belief, encouraged by politicians post financial crisis, that companies use bankruptcy as a way to protect themselves from risk, that is incorrect. Bankruptcy is a legal process for dividing up a failed companies assets so that it is not a free for all. It protects employees by preventing powerful creditors from forcefully claiming value until other constituents get paid in accordance with the legal statues of the process
It costs almost $0 for an engineer to build software and yet VCs have somehow managed to artificially raise the barrier to entry and got huge paychecks for themselves in the process.
If VCs did not exist, I'm certain that we would have all the software, websites and apps that we have today except that it would have cost society much less to get to that point... Also maybe these apps and websites wouldn't be the terrible morally bankrupt profit machines they are today.
That is quite a bold opinion, presented without any evidence at all. And my opinion is that is the opposite of true. For what you said to be true, not only would server / hosting / infrastructure costs need to be zero, but hundreds of thousands of people would have to decide to work 60 hours a week for free
It does not cost an engineer $0 to build software. Tell an engineer you think his / her time is worth zero and see what response you get
In effect, VCs used their money to gain a monopoly on user attention and this killed off a LOT of bootstrapped companies which would otherwise have strived.
At the moment they're in a very tough spot where they've issued bonds, folded Solar City into Tesla in a weird attempt at bad accounting and pretended like (already 3) new product lines were ready to take in pre-order money. Meanwhile they're using excess battery production capacity not being used for cars (which are stuck in slow production lines) for a quick (small) buck in Australia and Puerto Rico.
I think we're going to see either a secondary offer or new bonds being issued soon.
Disclosure: I have no opinion on Tesla’s financials. Everything might be fine. I have negative opinions about their cars. I do like SpaceX, and I like the people I’ve met at SpaceX.
> People are generally rationale actors
This is the internet, and people are allowed to speculate. "I am sure they know what they are doing, they are really smart people" is not an argument.
It's actually a rather punchy restatement of the Efficient Market Hypothesis. :-)
Actually not. The smart people described are all executives (experts) at Tesla. Their interests are therefore aligned, not individuals acting in their own self-interest in the marketplace.
In this environment, where the government subsidies they depend on may vaporize at any time, exciting accounting is really dangerous for the business.
Ehhh..
And you're assuming that top-tier people at a company are able to make rational and optimal decisions when their livelihoods depends on the perceived survival and success of their company.
so, assume the same would be the case for the comment you replied to. As with regards to "insinuating", etc.
Tesla would be better off if they designed cars and let someone else manufacturer them.
I don't understand sweeping opinions like this when you have no idea what you're talking about.
Your questions about it are interesting, unanswered, and not fatal to the idea.
After all, don't Foxconn, et al., have a stranglehold on the manufacture of Apple's iPhones? That seems to be working out ok for all parties.
Looking at their cash flow statement, they are spending a lot but mostly on capital expenditures.
I don't see any reason to even think about bankruptcy. They're doing fine.
https://finance.google.com/finance?q=NASDAQ%3ATSLA&fstype=ii...
I don't think this is really written for folks who are bullish on Tesla, anyway. It's written for critics, and for folks like myself who might describe themselves as "fascinated skeptics."
However I don't know what covenants are in those loan documents, and its possible that given the delays tesla could trip a covenant and get in trouble with lenders. Though I'm sure Elon has worked his magic on them as well
Hard to say if they're doing fine at this point, as the model 3 doesn't really show up in the financials yet. The real concern is that model 3 production capacity increases without sufficiently decreasing production efficiency. So revenue goes up but COGS skyrockets, and the business is structurally not profitable on even a gross profit basis. This would lead to huge financing needs, and also probably a drop in the stock price (though the stock price seems immune to dropping). This could lead to company failure and is not a theoretical risk
I don't know teslas model 3 unit production costs, but if you look at cost curves for other car companies as they scale up manufacturing, and take into account all the fixed costs and manual processes currently used in production of a small number of model 3s, the unit cost is probably massively high. Historically you can reduce those costs by 80%+ as you scale, so it is possible tesla can produce profitably.
On the other hand, tesla set the price for its car before it started making it. So it's entirely possible that they were underestimating the cost / complexity of the manufacturing process and that they simply can't support their cost base with that price. Again, this is a hypothetical, but real concern
More likely is they get there, but takes longer / more money than expected. And in a competitive world, that can be catastrophic
We don't know which of these hypothetical scenarios will play out, so we must assess the likelihood that each happens and value the company that way. Current valuation suggests probabikty of success is very very high and value of success is very large; id argue that both those numbers should be lower
Lenders usually don't exercise their covenants willy-nilly because doing so is a good way to end up with less money than you started with.
Most covenants are written broadly, in a way to let lenders recapture some of their principal in the event the corporation is indeed on the way to bankruptcy.
Specific example: company is floundering, throwing their remaining cash into a losing business. Lenders might prefer to trigger covenants, take them to bankruptcy, and liquidate and receive 60 cents on the dollar, rather than wait and receive less later on.
But if the lenders think the business is doing fine and they will eventually get repaid, the covenants are more of a negotiating position rather than a real threat.
Of course all this changes if the debt changes hands and, say, a hostile entity gets a controlling share -- but that's what finance departments are supposed to look out for.
if things start looking really bad, debtholders and equity holders will start clamoring for a change in strategy to preserve their assets. likely they would push to bring in new management to fix manufacturing issues, push for tesla to sell itself, or push for tesla to divest certain parts of its business, or some combination of the above
given how valuable tesla is, for anyone to want to buy them in whole or in part would require a massive drop in their stock price, so stock investors would probably be wiped out long before any bankruptcy proceedings started
Additional paid-in capital (https://finance.google.com/finance?q=NASDAQ%3ATSLA&fstype=ii...) went from $3.4B to $7.8B in 2016 to $9.0B as of 9/30. Issuance of stock provided $1.9B in 2016 and $0.5B so far this year (https://finance.google.com/finance?q=NASDAQ%3ATSLA&fstype=ii...).
What happens when the currently-expected market correction hits and Tesla has a harder time going to the capital markets for money?
Another problem that can happen though is interest rates going up, which makes leasing much harder. Most of the buyers/leasers depend on these low interest rates I'm afraid.
(minor negative: $1000 of the money paid for each model 3 sold already is in their bank account)
Granted there are some differences, but the strategy is the same.
Most people are tuned to think in terms of linear growth.
The moment companies like Uber and Tesla start making money, we need the visionaries to come in and start producing ever better products and services for ever collapsing prices.
Amazon had a lot lower losses.
The only way Tesla avoids bankruptcy is if the markets keep believing in the Elon magic, because the operations are definitely not financing the investment required.
This is the key thing people miss when people falsely compare Tesla to Amazon. Amazon has always been free cash flow positive. They may never have turned a GAAP profit for many years, but they weren't issuing stock to finance their growth.
If they did, they would have tapped the markets too.
Tesla is on track to burn >$500m/quarter going forward and will once again have to access capital markets in 2018. Junk bond markets have been puking for the past 3 months, so that option probably is getting less likely. That leaves equity dilution. Not good for current shareholders. http://archive.fast-edgar.com//20171103/APA8Q22CZM22D262222M...
A lot of the "Assets" noted on the balance sheet are the reservation costs for all of Tesla and Solar City's promised products. Tesla recently laid off a significant portion of their workforce at the Model 3 factory. Output was much lower than they had guided to for the quarter. It doesn't look like that's going to change soon. If customers start demanding refunds a lot of the assets listed on the balance sheet go away.
The liabilities on the other hand, won't be going anywhere.
People can insist that Tesla is effecting some positive changes in the world, but it seems to me that mostly they have been good at repackaging and reselling the tech of other companies in creative ways.
I've seen this critique leveled at Apple and it makes more sense there (the Mac borrowing heavily from stuff they witnessed at Xerox PARC and the original iPhone just doing what a lot of other phones at the time were doing, except simpler and more mass-adoptable), but what evidence do you have for this applying to Tesla? Even if you admit that battery technology improvements that made EVs viable were implemented elsewhere, the entire automotive industry was 100% behind the combustion engine before Tesla, and now almost every car company is building EVs. This isn't merely Tesla effecting "positive change in the world", they proved that EVs were manufacturable, that the public wanted it, and solved numerous obstacles to actually bring it to market. The EV would literally not exist (to the public) in 2017 if not for Tesla. How is that merely repackaging tech?
Tesla is not Apple though. In order for the analogy to Apple to work, Tesla would have to be shipping a massive amount of EVs (and a growing amount as well) while they were being criticized. They haven't. In fact the penetration of EVs as a % of all cars sold is single digits.
If you want to take the perspective of the author of the article, then we can at least say that Tesla may have induced rival car makers to at least get interested in EVs and demonstrated a small market exists for them, but it's not clear that once every automaker begins shipping EVs at scale that it's going to replace non-EVs in the market in a significant way. What if EVs just top out at 20%?
On another level it's kind of a silly perspective to take because real people have invested their money in Tesla. A lot of them might be rich tech workers who no one will shed tears for, but big institutional investors like Fidelity own significant stakes in Tesla, and they're managing 401ks for regular people.
I don't think too many investors who invested in telecom companies during the tech bubble took comfort in the fact that at least society was left with a lot of fiber and infrastructure.
What would Tesla even leave behind anyway? The only thing I can think of is the battery factory which hopefully would be able to produce batteries for other manufacturers. But even that is not clear to me since China is pouring billions into doing that as well (and they're going to have a lower cost of capital compared to some private entity without state backing).
According to wikipedia a rather well known EV Nissan Leaf predates Tesla Model S by 2 years. First hybrid Toyota Prius is 20 years old. Toyota had concepts of plug-in hybrids for quite some time. Countless local teams make electric swaps. We had electric golf cars and what not for quite some time.
What Tesla more or less pioneered is premium class performance EV and proved that there is market in this segment. They proved that not only "convenient home-work-home trip" (free parking, bus lanes, subsidies) can be market for EVs.
I know a lot of people who reserved their model-3 paying the deposit. Pretty much they all know that their deliveries are going to be delayed but still put up the deposit. They just don't want to cancel their reservation and lose their spot as long as they get their car.
I think once Tesla's battery problems are resolved and start delivering the model-3s, they should see the cash flowing.
Your description of their assets is also off. Customer deposits have NO net effect on their balance sheet/equity value. They very clearly have a liability of $686 million to cancel out the cash received.
Tesla's cash flow from investment was -$1.21B last quarter alone. I can scarcely think of a startup that consumed cash at this rate. That's an annualized rate of -$4.84B. Not even the pets.com or Webvans of the world ever reached this level of "cash burn." Cash flow from operations were -$300.56M last quarter, and losses were $671.16M. Annualized, this puts them at around -$1.2B and -$2.68B per year respectively.
If this is due to excess headcount from unreleased products, I say that's crazy and they should stop attempting those unreleased products.
I'm not going to necessarily make the argument that Tesla's share price is rational, but I do think this spending is good for shareholders. The balance sheet equity is a pittance compared to market cap. People are betting on large future profits. And there is just no way the level of production they are currently at could earn enough to justify the price. They have to grow. To grow they have to invest. It's just the nature of the business they are in. I think being in tech gives people the idea that you can create enormous value without capital risk, but that just isn't reality in most of the physical world. I think they are at least being responsible about it. They went out and established there was substantial interest for the 3 prior to undertaking all of this - something Ford didn't do for the Edsel, which in terms of financial sins would be on par with this failing.
To get back to the initial point here, I do think the amount of debt they are using might be a bit on the high side if you consider their current and not future revenue, but the capital markets have shown a huge willingness to stomach secondary offerings of the stock, so it seems like they can and probably will remedy that.
It's pretty obvious that current losses like these could easily overcome a decade-plus of future profits. Their debt is already rated a junk bond, so they aren't going to get any good deals on future debt. At some point, you would think, surely rationality will set in. I mean, Tesla is not the only EV manufacture in the world. Wouldn't it make more sense to invest in another car company that is also making EVs, and have finances that look much more appealing? Why would anyone subsidize a company just to produce a product that others can easily replicate? At some point, this has to stop.
Because you, and I think a lot of people, think Tesla is a car company. It's not; Tesla is becoming a battery company and a charging station company. That will make them as big as gas companies, because everyone will be needing both batteries and electricity, even if they need to offload their car business. Tesla will be far bigger than just cars for decades to come, and I think that's where a large part of shareholder trust is coming from.
I mean how many other EV charging networks are active?
But they can't. A car manufacturer generally has to renew its models every ~10 years with an overall mid-life. Tesla would be profitable if it had a net cashflow including these renewals. I'm not sure it's the case right now because it's difficult to differentiate between capex like building new assembly lines or R&D on core technologies and cost purely associated with the new models.
Tesla is spending a lot. More than they earn. Whatever back-of-the-envelope profitability model you attribute to their car making operation to differentiate marginal-operational from capital-investment costs, it does not add up to anything like enough to cover all costs. They cannot cover costs from free cash (as you say) which means they need capital coming in (as you say), debt and equity.
But, this doesn't mean they are selling elonmagic. No one would expect a car company to bootstrap, grow from cash flow. The place they expect to be is cash-hungry. This is what accountants are for, figuring out if a company is headed towards profitability when free cash flow is not an indicator.
The whole idea is that Tesla will be gradually capitalized to the point where it is like GM or Toyota.
Where elonmagic does come in is the same place startup-magic always comes in. It's novel in the auto industry. But, it's bread and butter on crunchbase (or here).
Does this company have the potential to create a large, high margin business. The accountant will have a harder time telling you this, and so will annual report readers. It's like answering the question Will Facebook manage to build an advertising business like Goog's? The answer turned out to be yes, so FB is worth a lot of money. Valuation of FB at IPO time was essentially the aggregate investor's answer to that question at that time.
Elonmagigic plays a big role in that 2nd part, unavoidably. This seems reasonable and to me.
Accounts are accounts. Sometimes the story is simple, and accoutns tell a simple story. Sometimes the real story is there, but takes context, digging and smart accountants to tell properly. Some important parts of the story are not in the accounts, like the fact the Tesla can apparently produce a faster supercar than anyone at 1/4 of the cost.
Their operating loss over the same period is $570M. As I also said, most of what they're spending is capital expenditure, amounting to about $3B.
I.e. the basic story here is simple: they're borrowing a bunch of money to build new factories, which is exactly what you would expect a new car company to do.
The NUMMI factory is worth little. Automakers are unlikely to want to repurchase a CA factory due to all the regulations they would have to deal with.
What solar tech? Solar City was an installation company, which Tesla bailed out and has been winding down. The solar freaking roof thing doesn't even exist yet--Tesla's reveal was a bunch of fake solar shingles.
People will very generously give Tesla all kinds of benefit of the doubt, but these people might soon realize they don't know what they're talking about.
Cash flow is up half a billion because they just issued 1.8 billion in junk bonds (which are already trading in minus territory btw). Meanwhile operating cash flows are increasingly negative to the tune of hundreds of millions per quarter.
Sure, they're fine if they continue to raise billions. But they're nowhere near profitable, and they're also going to continue to lose billions. What's going to happen if they receive a credit downgrade or institutional investors decide to stop playing along?
Thought exercise: how can competition take serious levels while Tesla produces half or more of the world's battery capacity?
This keeps getting repeated, but all I see are some meagre efforts which seem primarily focussed on headlines rather than actually delivering mass-scale EVs. Concepts. Demonstrators. The closest any of them have come is the Bolt (which is limited in availability, and their dealer networks regularly push people away from buying), and the Leaf (which until the most recent model still looked far too much like a golf buggy and had very limited range).
These are large companies with massive departments used to pushing out new vehicle models every year and updating production lines to suit.
I'm still yet to hear of any of the major manufacturers sign contracts for large scale battery deliveries to support any mass EV production.
I don't understand why their outlook is always 2019-2020-2025-2030 for their full EV range unless they're just hoping for Tesla to fail and finally be able to point out and say "See, EV doesn't work!" so they can go back to what they've been doing for a long while.
They can't setup scale-up battery production sites within years. That's why serious competition from traditional car manufacturers won't happen anytime before 2022.
Chinese producers are a different story. They have the government behind them for resourcing (Lithium and Cobalt). I see Chinese manufacturers as the most serious possible competition. However, it's not unlikely the government will not allow exporting of electric vehicles on a mass scale since they will want to use them theirselves.
He seems to be in some good sht (subpar assembly line for the batteries and/or engine having to be reassembled from scratch which is done according to him) so so far this particular problem is not out of control for Tesla, but then time is critical too, competition is ramping up, and laws are shifting (EV tax cut is gone now I believe).
I like Musk approach of going legacy free to stretch the limits of the current model, as he did for SpaceX. I'd be sad if Tesla choked enough to crash. If he just made it to the model 3 production that would be "cool".
I don't know how people in the know understand the recent Semi/Roadster unveiling, is it distraction to get some buzz or a final scheme to finance the model3 step with easier things to be done in 2020 (smaller market for Semi and I believe a litle less complex to build than a cramped 4 seater)
Point being, we want exactly this sort of thing, but it's foolish to expect the market to make this sort of investment very often.
First episode: https://www.youtube.com/watch?v=6bQW1fEUsbk
Most recent episode: https://www.youtube.com/watch?v=VXyIriINVK0
I highly recommend them if you're interested in investing in Tesla (long or short)
A major box it doesn't tick from a short sellers perspective is the "make something people want" thing. Loads of people want it's cars and would be trucks. The main question is can they deliver them but I'd be wary being short in case they can.
The question he is going to have to face is whether he can stay solvent longer than Tsla stock price is irrational.
My bet is he stays in 2-3 quarters until he makes his kill and then exits.
That said, the point that sticks out at me in the article is this one -- "... because money is how we measure success. And this is in fact true of most companies. But it is not true of Tesla. 'When a measure becomes a target, it ceases to be a good measure,' and this is as true of money as it is of any other measure. The purpose of Tesla is not to make money;"
There is a tremendous amount of visibility put on the company, and Elon is up front about what they are trying to achieve. The arguments against them succeeding boil down to either 'we don't believe you can do what you say you can do.' or 'we don't understand why you are doing what you're doing, so it must be wrong.'
It used to really bug me when someone told me that what I was proposing was impossible. I work to do the necessary research and foundation work to understand the risks and challenges of a course of action and someone says "Well, I've never heard of anyone who could do that so you clearly are missing something." No discussion of the idea, no attempt to understand how I came to believe what I did.
One of the things I admire in Elon is that he seems really good at just completely ignoring that noise. It is something I have tried to cultivate as it is helpful in starting new businesses or projects to be able to not get bogged down by people who want to tell you why you are wrong and are unwilling to listen to how you think you may be right.
These days they have gone a bit crazy but it works like this, I would buy Jan '19 call options that are out of the money[1]. Looking at some that are 'fairly close' (closed at $315, options at $320). They are selling for about $55 [ibid]. So you buy a contract (100 shares) which costs you $5,500. Now if TSLA goes up during 2018 people will want to buy those calls from you for more than $55. Of course if TSLA goes down, or stays down all year then come January 19 you can either buy your 100 shares for an additional $32,000 (which you won't since you would lose money on that deal) or let the call expire in which case the person who sold the option keeps the shares and the $5,500 you spent.
But here is the fun part, if TSLA goes up 10% (315 -> 346), now your calls are "in the money by $31", and if you look at calls in 2019 that are in the money for $30[2] you see they are trading around $69. Which if you sold your contract for that would get you $6,900 or a gain of 25%.
Compared to the alternative of buying 18 shares at 315 for $5,670, and selling them when they went up 10% to 346 at $6,228 for a 10% gain.
Buying actual shares is the safer way to go because if you buy a call option you lose the entire $5,500 if the stock doesn't go up above the strike price! Buying the call options gives you an opportunity to leverage the volatility for a higher return.
I've observed there is a lot of 'passion' investing (rather than say reasonable investing) in TSLA where people buy it regardless and so it defies gravity and goes up anyway.
[1] http://www.nasdaq.com/symbol/tsla/option-chain?dateindex=7&c...
[2] http://www.nasdaq.com/symbol/tsla/option-chain?callput=call&...
There's even more passion / panic investing and selling in cryptocurrencies at the moment. I think both Tesla and crypto are areas where a lot of people think they know a lot about, or are passionate about, and they go for that.
As Warren Buffett once said, the market can be delusional a lot longer than you can be liquid. You can be right and still lose a ton of money
Stocks exist to trick investors into funding someone elses ideas that they wouldn't fund otherwise by selling them casino chips that they can use to gamble among themselves.
The only reason the company should be concerned about their share price would be that they want to issue more and they'd like to get as much money for them as possible.
The law that makes boards care about value for investors is the most ignorant thing ever written.
If you're an American, it does matter in the sense that the subsidies that allow Tesla to keep moonshotting with relative comfort are paid through your tax dollars [0]. Tax dollars that could either go back to your pocket, or otherwise indirectly benefit you by subsidizing a more effective venture. Hell, some of those tax dollars could even be used to help the original moonshot institution.
I think what Tesla and Musk are doing is very cool. But let's face it, lots of companies and individuals could promise cool things if they had a multi-billion cushion. I think the OP makes some decent points about how silly it is to care about immediate or substantial profit margins -- hell, any investor in Amazon would agree with that.
But it seems dangerously naive to just think this:
> But it is not true of Tesla. “When a measure becomes a target, it ceases to be a good measure,” and this is as true of money as it is of any other measure. The purpose of Tesla is not to make money; it is to pioneer fleets of smart mass-market electric cars, and the infrastructure to support them, and battery technology which is not limited to cars. Making money is ancillary.
That is the claimed purpose of Tesla. The author is confusing Tesla's self-interested claims with reality -- this is basically Kool-Aid-drinking-cultism. And giving Tesla and Musk the complete benefit of the doubt in terms of altruism, that doesn't mean that their positive dreaming has an infinite buffer against shitty implementation and business practices. Profit is definitely not everything, but it's a potentially very useful signal (among others) to weed out non-performance and incompetence.
[0] http://www.latimes.com/business/la-fi-hy-musk-subsidies-2015...
Yes they get ZEV credits, but the revenue from those pales in comparison to their sales, loans, and stock offerings.
Not to mention that most of the traditional car manufacturers in America received huge government bailouts to stay afloat in 2008, so even if you slight Tesla for receiving a loan (which they repaid early with interest) they are still on equal footing with other manufacturers.
Tesla themselves generally provides their price comparison or total cost of ownership figures including the government subsidies.
So I suppose the main thing GM and such companies have going for them is that they have a track record of being profitable and they would likely have a stronger chance of remaining profitable sans subsidies than Tesla. But I realize that argument is basically begging the question, if not an outright tautology (Wealthy companies are wealthy).
Furthermore, it's not at all destined that if Tesla got into a failing situation that U.S. politicians would feel an obligation to keep pumping them up, or to bail them out, especially in an Trump administration. And Tesla can hardly be blamed for taking advantage of publicized subsidies, it's no less sneaky than the way entrenched companies have taken advantage of those subsidies for decades, nevermind tax loopholes and shelters.
So I'll weaken my argument to this: Tesla's inability to make money is not, as the OP suggests, a non-issue for Americans. Tesla may be no different than any company in using tax credits and subsidies, but the fact remains that if Tesla fails -- a much more likely situation in terms of the near future than it is with most of the other car companies -- those tax credits/subsidies will have been greatly wasted. Because think about it: if Musk could effectively deliver on his technology ambitions -- I don't mean prototypes, but implementation and successful production -- in what likely economic scenario would a good-acting Tesla continue to be bleeding money?
In other words, at some point -- not this year, maybe not in the next 5 years, but also not never -- the lack of profit might be a signal that there is something fundamentally wrong with Tesla, either in its goals or in its internal workings. And claiming to have or actually having grand, life-improving ambitions means jack shit.
Would the OP have written this kind of piece of Theranos?
No, for every ZEV credit or tax credit to the consumer, they sold a non-polluting electric car to the market. Even if the company disappears today, the cars will remain on the road.