Elon Musk is a very smart and ambitious man. There’s no argument about that, but his behavior often makes one wonder just what he’s thinking. Or if he’s even thinking at all, or just running Tesla like an astronaut “flying by the seat of his pants” guided by capricious judgment instead of instruments.
When Tesla filed its 10K Annual Report for 2018 with the SEC on February 19, on the first page it was noted that the company sells vehicles through its own sales and service network, which it continues “to grow globally” and that owning the distribution network allowed it “to improve the overall customer experience, the speed of product development and the capital efficiency of our business.” It also stated that Tesla opened 27 stores in the fourth quarter of 2018, the most since mid-2017, all of which sounded promising.
Then just over a week later, on February 28, Tesla administered electric shock waves by announcing a shift to strictly online sales and the closing of all but a small number of stores in high-traffic locations, in order “to lower all vehicle prices by about 6% on average.” This release was accompanied by a linked plan to finally offer a $35,000 mass produced Model Y – funded with cost savings from closing the stores. Ten days after that, a blog post on the Tesla website called for a “just kidding, LOL” do-over, saying the company would only be closing about half as many stores as previously announced and that some previously closed ones would reopen.
As if that wasn’t enough to give an investor whiplash, the blog also noted that “as a result of keeping significantly more stores open, Tesla will need to raise vehicle prices by about 3% on average worldwide.”
I’m not privy to what goes on inside Tesla, but I think it’s quite likely that Musk realized, or someone told him after he announced the “close the stores” strategy, that even if he closed them Tesla would still be on the hook for hundreds of millions of dollars in remaining landlord lease payments.
And those erratic missteps are only part of Musk’s electrifying image problem. There’s also his protracted battle with the SEC, which recently motioned the federal district court in the Southern District of NY to hold him in contempt for violating the Court’s judgment by engaging in the very conduct (another ill-advised tweet) that the judgment was designed to prevent.
With this constant spark of upheaval, it’s no wonder Musk has had a hard time keeping good people. So far this year, both the general counsel and the CFO have left Tesla. The latest exit marked the end of CFO Deepak Ahuja’s second stint at the company—he left in 2015 and rejoined in 2017 after then-CFO Jason Wheeler abruptly resigned. In 2018, the company lost key executives in: manufacturing, global supply management, worldwide finance and operations, human resources, engineering, worldwide service and customer experience, energy operations and security. The chief accounting officer resigned after just one month on the job and, since 2016, at least 40 top executives have abandoned the enterprise.
Separately, the competitive response to Tesla’s planned offering of mass-produced Model Y cars – now expected to sell for 11% more, at $39,000, in early 2021 – will be fierce. In fact, the Audi Q4 e-tron, BMW iNext, Mercedes EQC, and Porsche Taycan will all likely launch before then while GM’s electric Cadillac multi-vehicle platform will also come to market that year. Moreover, none of those competitors will publicly debate whether to close all their sales dealerships in order to save money to fund their new product launches.
And that’s all before we even begin to consider Tesla’s financial situation. Revenue was up considerably for the automaker, climbing to $21.5 billion from $11.8 billion a year earlier, while EBITDA climbed – from almost nothing to $1.6 billion. Note that the aforementioned EBITDA doesn’t add back over $750 million in stock compensation that Tesla paid its employees (mostly Musk) to show up for work in 2018; as an aside, there’s a separate class action suit in Delaware’s Court of Chancery against Musk and Tesla’s board for breach of fiduciary duty in approving this amount of compensation.
While both revenue and EBITDA have improved, Tesla‘s still burning cash to grow its business. Annual interest expense is nearly $700 million while capital expenditures are around $2.5 billion. Elementary math (deducting capital expenditures and interest expense from EBITDA) shows that Tesla shelled out over $1 billion more than it took in during 2018 and did so by borrowing even more —almost $600 million – from its lenders. However, its suppliers were even more complicit – Tesla’s accounts payable and accrued liabilities increased by an incredible $1.7 billion during 2018 even as some of them reportedly put Tesla on tighter terms (days of accounts payable dropped, from 80 to 58, year-over-year).
Obviously, Tesla remains very highly levered. It has about $11 billion of debt and capital leases. If you add other liabilities, such as accounts payable, accruals, customer deposits, deferred revenues and capital leases, they add another $8.7 billion of liabilities to its balance sheet. As of yearend, Tesla had cash of $3.6 billion, but it had to repay a $920 million convertible bond with cash in March. Recall, Musk was incentivized to drive up Tesla’s stock price before the aforementioned convertible bond matured – but, he failed to do so when the SEC sanctioned him after his “funding secured for buyout” stock manipulation tweet. Going forward, Tesla has another $570 million convertible due in November, thus reducing cash down to about $2.2 billion, exclusive of cash flow from operations. However, there’s another $1.1 billion of separate Tesla debt that matures and becomes due in 2019. Then, another $2.6 billion of debt matures in 2020 and still another $2.4 billion in 2021. In fact, Tesla has an endless debt maturity wall, where it must either borrow new money or repay existing loans. That’s not a great position for any company to be in, especially one with an erratic CEO who’s in court with the SEC while trying to execute a lightning bolt growth strategy.
That said, I don’t believe Tesla will file for bankruptcy this year, but the business is facing serious issues. Chief among them is just the uncertainty about its corporate governance, leadership and what future electric shock Musk might administer to his investors.
When you do things like change your strategy on the spur of the moment or get into a protracted legal fight with the SEC, it just makes it harder to refinance your debt when it comes due. Of course, it also drops like a lightning bolt on internal morale and corporate culture. A more cynical person than I might suggest that Musk is just tired of it all and is now looking for a forced exit. Even if forced out, he’d still own about 20 percent of Tesla’s shares high-valued shares (albeit, these are worth ~$4 billion less than when he tweeted about Tesla’s imminent buyout last summer) but he could next turn his energy to operating Space X. That might be the best result for him and Tesla’s shocked investors.