#teslamodel3

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

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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.

Tesla – reports of only 345 deliveries of Model 3 in November

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Seems that Tesla has only managed to make 345 Model 3s in November. A far cry from the promises to make 5,000 Model 3s every week by December. At the Q3 results the goal was pushed out til March 2018 at the earliest as “production hell” bites. Note that no single mainstream auto supplier is on Tesla’s deck which tells us how little faith they have in the company. Auto suppliers run on the smell of an oily rag and after so many bad experiences won’t accept dealing with auto makers who may jeopardize their own future. Recall how many auto suppliers almost went to the wall (many were in Chapter 11) after the tech bubble collapse at the turn of the century.

The other news is that Norway is ending Tesla subsidies and Germany has now disqualified Tesla Model S subsidies as the cars breach the €60,000 threshold. Finally a government that thinks it’s not advisable to give the well heeled tax breaks when it’s the battling insurance salesman Manfred from Bremen living paycheck to paycheck whose taxes to register his clapped out 1983 VW Golf diesel pay for it.

The shares have languished and even the hype of the new products and outrageous deposits has not converted into a ramp up. Q4 is likely to be a shocker at this rate. When will the faithful eventually pull the plug? Maybe Tesla should gamble the deposits on Bitcoin to see if they can lever cash flows that way?

Tesla Semi to haul new scrip or incomplete Model 3s?

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Elon Musk is rallying the call on his new truck which he is presenting this evening, albeit delayed from the initial Oct 26 launch.  He tweeted, “Tesla Semi Truck unveil to be webcast live on Thursday at 8pm! This will blow your mind clear out of your skull and into an alternate dimension. Just need to find my portal gun …”  If Elon Musk said that Tesla was superseding lead balloons with Li-ion his devout followers would fall for it as a logical progression with cumulus and nimbus charging stations providing endless power top ups. He is the ultimate salesman. One can only imagine the Tesla Semi will haul (in reality) incompleted Model 3s to double up on the promo!

It is hard not to see it as a distraction to tee up the next capital raising by revving up the share price to minimise dilution. Of course we must give full credit to Musk for his ability to rev up excitement among his faithful followers. He can do no wrong in their eyes. Spend 5 minutes on a Tesla owners forum and they are all gushing at their purchase and quick to virtue signal even when seeking help for trouble shooting whether it be a wayward navigation system or quality defects. They are followers of the Tesla cult and see their leader cando no wrong.

Still the truck is fraught with risks as we wrote at the end of last month. First, truck regulations are extremely tough. Even in America, crossing state lines has legal ramifications. While there are overall weight restrictions, there are also weight restrictions over each axle (defer to the DoT’s schematic below). So even if Musk talks of driverless vehicles (a USP for sure), a battery laden truck will likely be heavier than its diesel cousin. Higher rig weight means the less that can be hauled. Think of the Tesla 100D which weighs in at 2,250kg some 22% heavier than a fully loaded M550ix BMW.

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Also truck haulage companies are hugely conservative. Risking the switch to EV trucks could put them out of business. If it takes 30 minutes to “fast charge” a Tesla car how long will it take to charge a stack likely to be at least 10 times larger (300 minutes?) in mass if it’s to have any chance of hauling 35 tonnes any sensible distance.

For the 2018 model series of the major Class 8 truck makers, most have achieved an extra 8% fuel economy gains for on highway performance to around 5.5mpg. Tyre pressure monitoring and new slipstreaming bodies also assist in the fuel savings. With a 150 gallon tank option, a driver can in theory do 1,300km. Battery-powered semi-tractors may be useful in low-speed, short-haul duty cycles, but long-haul makes little sense because of the batteries bulk, weight and expense.

The battery pack in a Tesla Model S passenger car weighs in at around 600kg. The diesel engine in a Freightliner Cascade Class-8 truck weighs around 1.2 tonnes. So if we assume that the basic Tesla Semi package (ex powertrain), is more or less the same as the Cascade will two sets of Tesla 85D battery packs suffice to give similar range? As we mentioned earlier, in order to give a similar 400km range in a truck having to haul 30+ tonnes it is easy to imagine battery packs being at least 10x the amount needed for an 85D car. So 6 tonnes of batteries replacing a 1.5 tonne engine transmission combination. That would mean 4.5 tonnes less carrying capacity for a start and even then can it be properly distributed over the axles to meet road regulations? Like the chap above, the average truckie probably cares about the environment as much as his waistline.

Tonight’s truck is only having to move around 10 miles to its event. I’m sure the list of its capabilities will be an envious list “on paper” of its potential. Sadly to CM it looks like a distraction for its struggling Model 3 production woes by selling a future that has many questions about commerciality. Cars are personal modes of transport. Trucks are a business. Trucking companies are hugely conservative and won’t risk replacing an entire fleet until it’s completed rigorous field tests. Yes Class 8 truck sales may have nearly tripled in the last month to over 35,000 units but the series is highly volatile. In the auto world Tesla is playing in a local pond of 17mn vehicles. In trucks that is more a 250-400,000 market. Unless Tesla can promise huge market share gains in a field it has little or no experience  (even though his Tesla Semi Guy was a former Freightliner Cascade head developer) in reaching any economies of scale and reaching out to 1000s of haulage companies will be a stretch.

However spectacular the Tesla Semi lunch will be expect the share price to be pumped on the news don’t be surprised if an equity capital raising is towed behind it. Remember that farside cartoon of Ralph Harrison, king of salespeople, standing on a boat waving to eskimos that he’s just sold refrigerators to? That is Musk. A magician who runs on the smell of an oily rag. Looking forward to seeing if the fanfare proves right.

The fatal flaw in the Tesla ‘short’ argument

There is an old saying in finance – “the market can stay irrational longer than you can stay solvent”. Indeed after the shocking results of Q3 reported on Nov 1, Tesla shares recovered some of the lost ground as disciples looked at the psychological level of $300 as a bargain. We shouldn’t overlook the fact that the recent $1.8bn bond capital raising was 8x oversubscribed.  While 5.35% coupon on the 2025 bond is probably part of the thinking in an income starved world, reading the Tesla Worldwide Owners forum the fever pitch of its fans would seemingly make record cash burn of $16mn a day is irrelevant. They’ll seemingly fund Tesla’s endless greed for cash like Veruca Salt’s father in Charlie and the Chocolate Factory.

We do not shy away one bit for the 30 reasons why we think it will be a bug on a windshield on fundamental grounds. As we wrote even on rosy scenarios of hitting its 1,000,000 target and selling at margins similar to BMW it is worth 40% less than it is today. However some forums said it would be worth $900/share making the stock worth $100bn. All this despite Tesla possessing no technological edge or patents to give it a lead. The dreams of its solar rood tile and power wall business and discussions of the new EV Tesla Semi all act as distractions to fuel hope. So we will see the loyal disciples of the Tesla religion put fundamentals to bed and preach to the faithful that they should add more to the collection plate.

Tesla – to err is human. To blame on somebody else is even more human in a dog eat dog industry

This video sums up Tesla’s Q3. Elon Musk (on the left) blaming his supplier on the right. We shouldn’t discount that Tesla maybe pushing the boat out on payables ($3.9bn). As mentioned in the big Tesla report published on Monday, the fact Tesla doesn’t have beefy mainstream suppliers serving it is telling. US suppliers have been bitten too many times to take on high risk projects which won’t provide any better margin. It is a fact that suppliers need stable production just as much if not more than the manufacturer. If a car maker has 20 models and only one stinks and that is the one you’re supplying to then losses are going to result. So blaming suppliers is hardly going to win over the more seasoned players to change their mind on Tesla. Dobbing in your suppliers shows poor management period. Who ate the cookie?

 

Tesla – Aussies will remember One.Tel

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Before mobile telecoms provider One.Tel went bust, it had a cash flow situation like this – operating and investing cash flow negative while financing cash flow was positive. Tesla’s looks eerily similar. The problem is simple. If operating cash flows keep falling and investing cash flow keeps rising, at some stage the ability to raise cash (i.e. financing cash flow) becomes problematic. On the basis of Musk’s Q3 tele-conference Q4 cash position is likely to be worse with milestone payments and production being way behind forcing even nastier cash flow headwinds.

The problem Musk faces is that the federal tax credit is coming to an end sometime next year. Currently in California, you get $2500 kick back for buying a Tesla Model 3 on top of your $7500 from Mr Trump. So $10,000 off meaning your $35,000 Tesla only costs $25,000 (29% off). However if the tax incentive is cancelled at the federal level, the $35,000 Tesla is only $32,500 (7% off) meaning some of the 455,000 outstanding orders may wither on the vine. Remember how the virtue signalers in other parts of the world have reacted when generous EV subsidies come off. In HK, orders after the tax break was ended fell to ZERO and in Norway they plummeted 94%.

So Tesla isn’t just running a race against time to get production sorted to stop the cash bleed it faces a double whammy of its pitiful production rate causing order cancellations when people realise that The Donald may have already burnt the federal tax scheme by the time it lands on the dealer forecourt.

What buried One.Tel is that it owed suppliers so much in payments for equipment yet its cash in from customers was not growing fast enough to stop the wave of cash leaving. Tesla may indeed face the predicament of customers demanding the $1,000 deposits back. What was it Musk said about burgers (you can find out on page 6 here). Better start flipping them burgers Tesla!!