Guest post by otalp
Summary of Tesla’s situation:
- Tesla currently has 2.67 billion in cash.
- About 1.1 billion of this is in loans that need to be returned early next year
- Around 40% of their cash in hand is from refundable deposits, many from people who thought they would get a $35k car
- Tesla cannot make $35k Model 3s at a profit right now or in the near future(this is generally accepted, and even Tesla hinted at it), they’ll probably lose money even making $42k cars. They need to make $50k cars at scale to earn strong profits
- When asked in the earning call last for last quarter about reservations and how many people chose to cancel/take up their car once offered, Musk stunningly called the question “boring” and “boneheaded” and went on take questions from a youtuber for 20 mins. This was considered unprecedented and bizarre and stock dove.
- Tesla is losing about 800-900 million a quarter, so they will run out of money without a cash infusion. Literally everyone(all major banks/investors/analysts) knows that Tesla will need to raise capital this year.
- Musk though, has insisted that Tesla will not need to raise cash because they will be “profitable by Q3 or Q4”. A reminder that they lost 780 million in Q1, and even small profits won’t be enough to prevent running out of cash. In order to make sustainable profits they need to sell around 10,000 model 3s a week. They were supposed to produce 5000 cars a week in 2017. They have just now been able to produce 2500/week.
- Even bulls say that Musk is bluffing and he will eventually raise cash this year. Moody’s downgrade of Tesla to essentially junk stocks makes it harder to raise cash at good interest rates. Moreover, there is speculation and some evidence that the reason Tesla haven’t already done so, is that they are under SEC investigation which would prevent them from raising cash without disclosing a lot of details harmful to them.
- Tesla has access to standard credit lines for about 500 million, but they recently had to pledge their Fremont factory to just maintain these credit lines.
- A lot of Tesla’s financial executives have left the company – a red flag to many including Jim Chanos, who famously shorted Enron due to similar indicators. The head of autopilot left and the head of engineering left ‘for vacation’ recently
- Tesla’s autopilot is complete false advertising. Their original autopilot was developed by MobilEye. MobilEye hated tesla’s exaggeration of the system’s capabilities and withdrew their supply after a person died using autopilot. Tesla responded that mobileye was jealous of Tesla’s superior “Enhanced Autopilot” which has hardware capable of full self driving. It is generally accepted on owner and enthusiast forums that enhanced autopilot is worse than mobileye’s system right now(edit: in the last few months some people feel Enhanced AP has surpassed the original one in terms of capabilities, though most agree it is still less relaible), and in general both are basically lane-keeping system with AEB. Waymo and GM/Cruise are far ahead with their FSD capabilities than Tesla(again, widely accepted)
- Part of Tesla’s debt comes from bailing out Solar City, a completely unprofitable company loaded with debt that was run by Musk’s cousins. Some people saw this as nepotistic and a conflict of interest(Musk held part ownership of SolarCity while his cousins ran it), with a few investors suing Tesla over the deal.
- Starting from 2019 and 2020, all the major automakers are bringing out electric models. This will further damage Tesla’s competitiveness, since they have the wost QA and build quality due to their haphazard and panicked development process and their $7500 tax credit is about to run out.
Despite all this, the market cap of tesla is larger than Ford, Fiat and nearly equal to GM. Their inflated market cap(which even Musk admits is inflated if you “look at past results”) is fuelling their funding which inflates the market cap even more as they lose more money trying to make bigger promises.
What does Tesla have to its advantage? Tremendous marketing and brand value. They’re probably inching towards or even surpassing Apple – and virtually all of this is tied to Musk.
What does Tesla have against it? The realities of running a business and actually making the products.
Edit: I did not expect this to blow up and regret not linking the sources(the original text was for myself and people who follow tesla closely). Most of it is from quarterly earnings report, public statements, article and analysis. It’s very late night here, I will update this comment with sources for every point tomorrow. In the mean time you can google most of the specific ones. (Eg: ‘Tesla Fremont factory pledge’ leads to this: www.reuters.com/article/tesla-factory/tesla-offers-fremont-factory-to-boost-liquidity-ifr-news-idUSL1N1SF2LU) or ask at r/RealTesla
Also: I don’t short Tesla and I am not an investor or stock expert: just someone who’s spent the past few months researching them out of curiosity that stemmed form my interest in them. I think people should be exposed to the reasons why Tesla is betted against, as people don’t hear the reasons in the mainstream – just the fact that they are ‘in trouble’ or ‘shorted’. But most people would like to know more, so I posted this.
Edit 2: I’m back, here are some quick responses to common questions:
1)’Some German engineers recently said Model 3 cost 28k to make after Production and Materials were accounted for’.
This only takes into account production costs but Tesla have way more costs with them due to being new to the industry and creating their manufacturing process.
Erik Gordon, a professor at the University of Michigan’s Ross School of Business says the margins on the Model 3 must still pay for a cost structure that legacy carmakers don’t have, including planned factory expansions, new automation investments, and its own dealership network. While Tesla has its own advantages, like integrated solar and energy storage products and no costly pension liabilities, the company is counting on fat gross margins of 25% to stay in the black. (Ford by contrast has 10% margins.) The $28,000 estimate for building the Model 3 “shows there’s some possibility of making money at the low end,” said Gordon. “But it actually doesn’t leave very much [money] per car for all the other expenses. If they’re selling it for less than $50,000, I don’t think it’s a good business.”
2)’Weekly rate is not 2500 but 3500 or it will soon hit 5000′
Last official numbers(Q1 report) are 2500 at the end of March and that was a burst rate(they put all their efforts over a short period of time, not consistent rate across the quarter). They “expect” to reach 5000 by end of q2 but they also expected that by 2017. Again if it’s a burst rate it’s a pretty useless metric. Tesla aren’t expected to reach 5000/week on avg on q2, but 5000/week one week in q2 which is very different.