There’s no CEO on the planet more exciting and futuristic than Elon Musk – the founder, principal owner, chairman, and Chief Executive Officer of Tesla Inc. (NasdaqGS:TSLA).
While he is undoubtedly all of those things, some detractors say he’s also a sham salesman, selling snake oil to the masses and greedy investors who want to believe his cars, solar homes, space adventures, and tunnels are our future.
As for me, I think he’s a genius. However, I’m not convinced his endeavors are going to work out for investors.
Lots of problems are brewing for Tesla and Mr. Musk’s related companies, and it’s all about to come to a boil – and likely sooner than we think. Investing in the stock is not an option right now, but I have a sneaky play that could have you rolling in the dough while the company scrambles.
Tesla’s Real Problem
First, I think the Tesla Model S is a stunning and superior automobile, in every respect, from styling to technology to ultra-extraordinary performance.
The Model X… Not so much for me. The Model 3, not so much either. In terms of styling, I don’t love either the X’s or 3’s mass-market, boxy-looking stance or profile.
Here’s the thing on the cars. The Model S was a breakthrough in every way. Without it, there wouldn’t be an X or a 3. But the S is expensive and has a limited audience.
The X has a much wider audience, but it still hasn’t been selling well.
It looks like the mass-market 3 is the company’s hope in terms of getting to economies of scale and eventually profitability.
I say, good luck with that.
Elon Musk has never delivered on any production promise, ever. Not even close. That seemed okay with equity investors because the hype over the S was so outrageous that they practically believed Mr. Musk walked on water.
The biggest problem with not delivering on production goals on the Model 3 (which was supposed to be up to 5,000 units a week last quarter), is other electric vehicle (EV) makers are catching up, and they’re about to come to market with better cars for the same – or less – money.
They’ve got bigger problems on their hands. What specifically?
How about cash flow? How about cash vs. debt? How about “inventory” or receivables?
Tesla’s net working capital went from $1.44 billion in June of 2016 to negative $2.27 billion as of March 31, 2018. The company’s been bleeding cash.
Luckily for them, they say they have plenty.
If you think sitting on $2.7 billion in cash and cash equivalents is fine, while you’re sitting on $12.12 billion, then they’re fine in terms of making debt service.
That is, until you look at their cash position. The cash equivalent picture gets murky for me because they have “inventory” listed as cash. Does that mean cars in production? I hope not.
Why? Because they’re already counting customer deposits on cars yet to be produced far into the future, as cash on hand. That’s worrisome to me is because about 35% of the company’s so-called cash position is customer deposits. Fully refundable customer deposits.
If they don’t get production up very quickly, all the while competitors come out with better-looking, less expensive offerings, they’re going to have to refund a lot of that money. And they’ll see not only a drop in their cash position but a drop in orders.
That looks like it could be a negative feedback loop I’m not sure they’re going to be able to navigate.
There’s no question in my mind, no matter what Mr. Musk says, Tesla’s going to have to come to market before the end of the year to raise more cash, one way or another, by debt or equity.
Make that by equity. Because the bond market isn’t going to make a raise easy on Mr. Musk.
Tesla Isn’t Where It Needs to Be
Already, Tesla’s 5.3% coupon bonds maturing in 2025 are getting hammered in the secondary market.
This week they traded just above $86, way down from the standard of $100. In other words, investors are selling them, not buying them.
If Tesla wants to borrow in the bond market, they’re going to have to pay. Especially if their barley investment grade bond rating gets cut to junk. Which, in my opinion, is about to happen.
Sure, I could offer up how free cash flow metrics on Tesla are bad or how levered cash flow is negative $1.44 billion. Or how margins on the Model 3 are a lot less than what they are on the Model S, which would worry you but bore you.
But I prefer to make a simple case. If the future of Tesla automotive is the Model 3, and they’re not producing and delivering them, and they must return deposits to buyers who buy elsewhere, the grand facade quickly fades.
That doesn’t mean Elon Musk won’t point to California making the future of homebuilding about solar homes, or that some other company product, like battery storage, won’t carry the day, he will.
But mass-producing autos is his path to profitability, and he’s not there. Tesla isn’t there.
And they’re not going to get there this year. Or next year. Or the year after that.
That’s why I’m inclined to bet against Tesla’s stock and bonds.
As far as the stock, it’s tough to short it, and it’s a dangerous play. There aren’t a lot of shares available to borrow to short. That makes the stock prone to short squeezes, which somehow, Mr. Must seems to help orchestrate and always revels in.
It makes you kind of annoyed, you know, to have such a great mind behind such a flawed company.
It makes you tired of relying on stocks. If we’re being honest, there is no certainty with energy stocks, tech stocks, pharmaceutical stocks… Any stocks.
The only thing that’s certain is that the stock market itself is an ever-shifting force.
Let everyone else bet the farm and take those ridiculous risks. Let them buy healthcare stocks, retail stocks, energy stocks… Whatever they want. Most of those stocks are heading to the infirmary anyways.
I don’t know about you, but I’d much rather rely on something else…
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For my money, I know how I’m playing Tesla, and I have a strategy in mind for you as well. If you get the timing right and Tesla’s stock folds like a house of cards, you could make a nice chunk of change.
Maybe enough to get a ride on the Space X when it offers paying customers a ride into the future.