#elonmusk

If only Elon Musk could summon institutional questions

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Elon Musk has apparently terminated the question of a Bernstein analyst ((followed by the rest of the institutional queue) on the basis of it being “uncool”. He said, “We’re going to YouTube [for retail investors]. These questions are so dry. They’re killing me!” If only the Tesla CEO could summon the right type of questions that deflected criticism of the company as easily as maneuvering a parked Model S from a tight parking spot.

While he urged non-believers to sell the stock, there is little to be gained pushing a line of  opacity for a company with production issues, continuing losses and $10.6bn in debt. Earnings results are not about having fun but for investors/analysts to probe and qualify assumptions in the interest of making rational investment decisions.

CM has made constant reference to Musk’s amazing ability to sell. He is coming up to the pointy end of having to deliver. There are countless distractions which perculate below the surface – copyright infringement trial launched by Nikola Motor, the NTSB autopilot probe, countless resignations and recent calls to cut the staff canteen cookies. By blowing off the main investor pool that feeds him, the question of CEO capability becomes a bigger factor than the dreadful earnings themselves.

There is no better disinfectant than sunlight but Musk continues to deflect. Cash flow continues to decline  The production shutdown in April will thump Q2 earnings, not to mention the capex spend should rise plus the write off of equipment that has proven to be surplus to requirements. Here he is talking of 10,000 units a week down the line to fill the hearts of the faithful followers. Perhaps his comments about not needing to raise capital are best addressed by the fact he’s raised 7x since that statement.

Today’s results meeting is more telling in that snake oil salesman tactics of talking up the situation was replaced by silence and stonewalling. Telling.

Cutting back on the Tesla staff cookie tin

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Where have we heard this before? When companies look to tighten the belt, bosses often pat themselves on the back by cutting back on ‘unnecessary expenses’ like staff coffee room biscuits. That somehow over a 12 month period a company hemorrhaging millions has saved $832.67 on cookie cutting. Maybe $1,239.31 on fewer newspaper subscriptions. Well it seems Tesla’s Elon Musk is getting tough on approvals. Well he might especially after claims he doesn’t need a capital raise and made wise cracks about going bankrupt on April fool’s day.

Musk tweeted that his finance team were going to be out to trim back on any expense deemed not vital to the cause. All $1mn approvals must be solely signed off by the CEO himself. Suchnis the extent of ‘production hell’ he has moved to 24-7 shifts to hit his slated targets.

His email also bragged,

It is extremely rare for an automotive company to grow the production rate by over 100% from one year to the next. Moreover, there has simultaneously been a significant improvement in quality and build accuracy…

Indeed it is extremely rare to have auto companies doubling production year over year because most companies never plan to improvise their manufacturing  methods to start with. Toyota doesn’t meet a week before starting a new vehicle build and have a thought bubble. “Tanaka-san, did you get hold of Fanuc to see if they have any spare robots they can install by Friday?” Moreover the quality improvements are also a celebration of dreadful moving to mediocre. These aren’t achievements in any manufacturers book. They’re a candid admission of ‘amateur hour’

Musk continued,

Any Tesla department or supplier that is unable to do this will need to have a very good explanation why not, along with a plan for fixing the problem and present that to me directly. If anyone needs help achieving this, please let me know as soon as possible. We are going to find a way or make a way to get there.”

Seriously? It is a rather frightening prospect now that the CEO, whom took over the production floor several weeks ago, is sending a  crisis stations email to staff and suppliers.

His levels of lashing out of late seem somewhat concerning. Two weeks ago he accused the NTSB of lacking credibility by kicking off Tesla in the investigation panel into the recent death caused of a driver in California who had relied on autopilot Attaking the regulator is never a wise move. Worse, he blamed the driver in response to a lawsuit launched by the deceased’s family claiming he put too much faith in a system he champions as smarter than humans. Which is it?

Musk’s full letter to employees is here but perhaps he should take a lead out of the Riva Aquarama production line book. Carlo Riva built the Ferrari of yachts with excruciating attention to detail. All the different stages of production crew had different coloured jackets on. When looking out his window if he ever saw colours mingling he knew he had a problem.

Musk talks the confidence game but the pressure is bearing down on him. Senior departures, impending court actions and a production system that has been found wanting after such a short period of time that major changes need to be enacted because the original concept was so poorly thought out. So much for sensible factory capex allocation.

Elon Musk also made surprising remarks about the new found existence of sub suppliers. Musk can’t  lick his finger to find the direction of the wind forever. This is rookie level discovery. Frankly shareholders should be very concerned.

Do as I say not as I do

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Tesla’s senior VP of engineering Doug Field has been selling down his stake in the company despite suggesting he’s  insulted by those shorting the stock. Field has sold over $6.5mn in stock since Sep 2015, selling $500k worth in recent months according to filings. Surely any company that has signed off on an incentive package triggered at a $650bn market cap (12x today) would be nuts to sell any of the stock now. Will Musk’s April Fool’s joke about Tesla’s bankruptcy actually become a self fulfilling prophecy? Be careful why you wish for!

Virtue signaling fails again at the ballot box

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No matter how dreadful the Liberals under Turnbull are at a federal level, South Australians realized that the 16 years of Labor in SA led them to the slowest growth, highest unemployment and most expensive electricity prices in the nation thanks to the loony renewables policy of the Weatherill government.  He ran a platform to double down on the failed policy that led to multiple state wide black outs. Common sense prevailed and he was rightly booted.

No amount of blowing up coal fired power stations or smug smiles while shaking hands with Elon Musk to make out as if wasting $560mn more of taxpayers money was intentional, could sway the hearts of the electorate.

The Libs gained a majority on its own right with 25 seats. Labor set to lose 5 seats to 18. The Greens lost more ground in SA, slipping over 2% to 6.6%. No seats. At the sharp edge of the wedge, a growing number of constituents don’t need the virtue signaling. They want sustainable jobs, sensible stewardship of their tax dollars and reliable, affordable electricity.

Whether the Libs can actually deliver is another question but Premier Weatherill’s flagrant failure came home to roost. However Turnbull mustn’t take these state victories as an endorsement for the coalition at the federal level. He’s still badly burnt toast.

The day Elon Musk gets asked by…

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Elon Musk said in the FY2017 conference call today: “Super Bullish…What I find sort of interesting is that our competitors – the car industry thinks they’re really good at manufacturing. And actually they are quite good at manufacturing, but they just don’t realize just how much potential there is for improvement. It’s way more than they think…I went through this math I think on a prior earnings call, but like it sounds like some of the fastest car factories produce a car maybe every 25 seconds. That sounds fast. But if you think of a 5-meter long car, including gap, and a 4.5 meter car with a half meter gap or something, that’s only 0.2 meters per second. Like grandma with a walker can exceed the speed of the fastest production line we’re in, so really no that fast. Walking speed is one meter per second, so five times faster than the fastest production line on earth.”

Listening to commentary like this just shows how cavalier the processes at Tesla are. The day Tesla gets called in by other kings of industry for lessons on production techniques the comment will hold water.

Toyota, which has coined almost every manufacturing effficiency jargon over 50 years, was invited by Porsche to fix its problems in the 90s. Several years ago Toyota was called in to help Lockheed Martin streamline production of the F-35 Joint Strike Fighter because of the massive cost overruns. The day Boeing calls up Elon Musk for tips on how to belt out more 787s two slices of humble pie will be consumed immediately.

Seriously one has to question how this board can believe it has the potential to be worth more than all the other volume and luxury auto majors combined when they make such fictitious claims. Sounds like Sakamoto from Elpida promising endless dreams. Elpida went belly up because it failed to deliver. .

Tale of the gold coin chocolate & a warning for Tesla Disciples

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It hadn’t really hit until going back to read the conditions of Musk’s new executive compensation package but the first thing that struck me was the risk of the old adage of paying too much attention to the share price. The collection of all 12 tranches for CEO Elon Musk only kicks in when his company hits $650bn in market cap. The first thing to pop in the head was that of Japanese mobile phone retailer Hikari Tsushin back during the tech bubble. The rather eccentric CEO Yasumitsu Shigeta had gold coin chocolates made embossed with “Hikari Tsushin: Target Market Cap Y100 trillion.” One could only conclude he believed in his own BS.

It was at that moment where the only thing that crossed the mind was ‘this spells trouble’. There were magazines like Forbes touting how Shigeta was one of the richest men in the world and analysts fell hook, line and sinker for this unrealistic dream forecasting he’d be #1 before long. The only rational conclusion for the Contrarian Marketplace was to tell them that “bet he won’t be in the top 100 next year.”  Low and behold the tech bubble collapsed and Hikari Tsushin – that believed it was worth 2x the market cap of then highest valued corporation in the world, General Electric – fell over 95%.

While Musk may not yet have printed target market cap $650bn gold coin chocolates, what the incentives are saying to the market is that his company needs to be worth more than Daimler, BMW, VW, GM, Ford, Toyota, Nissan, Honda, Renault, Fiat-Chrysler Ferrari and Porsche combined. Just read that last sentence again. Do investors honestly believe that Tesla which consistently misses and is going up against companies that have been in the game for decades, seen brutal cycles, invest multiples more in technology and forgotten more than they remembered will somehow all become slaves to a company which has no technological advantages whatsoever?

Once again, this compensation package screams of gold coin chocolates in mentality. Instead of running the business and letting the share price do the talking, the mindset is focused on launching convertibles into space and distracting investors from increasingly dreadful financial results which eventually must come full circle if the results continue to miss. Broader Tesla report here.

Tesla’s FY2017 – cashflow stunts bigger than a roadster in orbit

TESLA CF VS ONETEL

No beating around the bush. Tesla’s cash-flow situation resembles that of One.Tel in Australia before it became insolvent. Rocketing financing and investing cash-flow with troubled operating cash which in Tesla’s case was flattered by some accounting trickery.  The Q4 2017 earnings release spoke of fairies and magic pixie dust for the most part. Q1 deliveries to date look to undershoot.  Once again a promise to hit production of 2,500 Tesla Model 3s by the end of Q1 and 5,000 a week by end of Q2 2018 (i.e. 6 months away). Note that Tesla had about 860 undelivered Model 3 cars at the end of Q4. That is a high ratio given 1550 were shipped in Q4.

While the company claims a cash balance of $3.4bn which many will pop champagne corks over, Tesla has accrued liabilities, accounts payable and customer deposits totaling $4.975bn at quarter end. This also excludes the $608mn in extra ‘residual value guarantees’ on the books YoY.

The company expects to break even during the year. However with gross automotive margins about to suck up the Model 3 in larger numbers that will take some doing despite claims it can do 25% vs the existing line-up’s 18% range. As at January, Q1 sales in the US are at 2016 levels and European registrations are down around 14% in aggregate across Norway, Holland, Italy, Belgium, Sweden, Austria and Switzerland. Lots can change but it doesn’t read well to kick off 2018’s challenge to break even at an operating level. The Model 3 is on average two-thirds cheaper than the average selling price on existing products so to even hold margins constant will take the mother of all cost cutting all the meanwhile facing new competition over 2018 which will weigh on pricing.

Interesting within the operating cash-flow statement is a term “Changes in operating assets and liabilities,net of effect of business combinations” which shows a quarter on quarter swing of $746.8m pushing net operating cash to +$509mn achieving a new quarterly record. This was achieved mainly by improved collection of receivables (believable), inventory reduction of finished vehicles (were incomplete vehicles that left the factory to parking lots yet to be delivered due to a lack of parts counted?), improved working capital from the ramp of Model 3, and growth in customer deposits (this was only  $168m QoQ vs expectations of $400m) from Semi and Roadsters that were announced with fanfare during Q4. Cash burn appeared lower because the company included customer deposits for the upcoming Semi and Roadster in its operating CF. That is slightly deceiving because deposits aren’t supposed to be drawn from current operations. The Roadster is supposed to be ready by 2020. This seems odd.

Tesla wrote “Despite the delays that we experienced in our production ramp, Model 3 net reservations remained stable in Q4.” Strange there was no mention of progress on Roadster and Semi orders in Q4. Was the $250,000 deposit within 10 days for the Founder series Roadster a bit steep? Truck orders seem around 600-700 at this stage and at $5,000 a deposit, generously speaking $3,500,000 isn’t a swing. As mentioned earlier the +$168m in customer deposits could only reflect how poorly orders for those vehicles are tracking such is the need to avoid talking about them in the statement (surely something to crow about) other than projected performance stats.

Capital expenditures in 2018 are projected to be slightly more than 2017 according to the statement. Tesla also mentioned “quarterly operating income should turn sustainably positive at some point in 2018.” That is a hugely optimistic target for the company which has failed so many times to deliver on promises. As CM always argues, the ‘cult’ following of Tesla is a dangerous vixen which can keep the ‘dream’ floating in orbit when reality is that “Nevada, we have a problem”.

The market can stay irrational longer than you can stay solvent. The 3% bounce in the shares reflects that blind optimism. Our study shows that even if it made margins similar to mainstream makers it is grossly overvalued.