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Elon Musk, CEO of Tesla, Inc. (TSLA), and other company executives participated in a teleconference Thursday to convince investors to acquire $ 2.3 billion to $ 2.7 billion for the sale of 'shares and bonds. All regular players participate with Goldman Sachs and Citigroup. You can find both depots here and here.
After months of claims that there was no need to raise new capital, Tesla has turned around, apparently based on the disappointing first quarter results as they emerge from the 10th. -Q released Monday. Cash and cash equivalents dropped to $ 2.2 billion, an unprecedented level for a year, and management was born. The right time to borrow, is when you seem to not need money. Increasing now could result in higher interest rates or coupons. Six months ago, when Tesla was on top in profitable quarters, the timing would be much better.
Model 3 does not deliver the Holy Grail
Do you remember those beautiful passages of the update letters intended for T3 and T4 investors last year?
As we went from a manufacturer at 100,000 units a year to a manufacturer of about 340,000 vehicles a year, our revenue profile has changed considerably. Sufficient profitability of Model 3 was essential to make our business sustainable – a goal that many argued would be impossible to achieve. Due to the ingenuity and hard work of our team, combined with an innovative vehicle design and manufacturing strategy, we achieved a total automotive gross margin of about 25%.
In total, we expect to deliver between 360,000 and 400,000 vehicles in 2019, representing growth of approximately 45% to 65% over 2018. Within this range, we expect positive GAAP net income and positive free cash flow (operating cash flow less capital investments) every quarter after the first quarter of 2019. We believe that these results will be largely related to our restructuring and the existing financial discipline with which we operate the business.
It now seems that all the great optimism that existed until last February has almost evaporated. Model 3 will no longer be the great salvation of Tesla, Inc. This control has been passed to the technology of "autonomous driving" and of course, the sustainable profit targets for Tesla have been shifted to 2020 or beyond.
Regarding this "broad call", organized Thursday by Goldman Sachs and Citibank with potential investors in new equity and debt offerings, CNBC.com reported the following:
According to the two investors who heard the call, Musk described Tesla's existing business segments in the areas of electric vehicles, solar energy and energy storage as a core value for Tesla's business as part of a new solutions era.
Repeated musk because Teslas can be upgraded "over the air" with new features and features enabled by software, they will gain value, unlike almost every other car on the market. Tesla will be worth $ 150,000 to $ 250,000 in 3 yearshe claimed. He also said that a complete upgrade to self-driving would increase the value of any Tesla by a half-order of magnitude, or five times.
When calling investors on Thursday, according to people who heard it, Musk and other Tesla leaders refused to give details at more pragmatic issues like Where is the company's order backlog today, what is it doing to improve Tesla repair and service issues, the revenue that Tesla hopes to generate from regulatory credits for the rest of the year?and who will supply the battery cells to Tesla in Asia as she begins to manufacture the Model 3 in Shanghai.
But he (Musk) also tried to bring the conversation back to autonomyin the caller the fundamental engine of value for Tesla, and urged investors to stop wincing on vehicle margins.
(underlined by the author)
Tesla's hosts should be happy that Musk did not call these questions "open-minded".
Current investors should find this news alarming for several reasons. The idea that a car will miraculously increase by five times its value or more depending on its ability to use it to generate revenue is nonsense. Tell the millions of Uber and Lyft drivers who use their cars every day to generate revenue. I grit my teeth every time I hear Musk make this comment.
Musk was clever in his plan to use model 3 lease return units that would have a residual value of less than $ 15,000 as robo-taxis. But if he thinks of selling them at $ 150,000, he is very wrong.
If investors listen to this new story, billions of dollars have apparently been invested unnecessarily in the production of vehicles, services and sales operations. Factories and carriers could all have been eliminated by investing more in software and hardware development. All the Tesla should have been working all this time to become a "500 billion dollar company" was a completely autonomous driving system. It seems that the entire mission of creating sustainable driving machines that reduce carbon emissions and other harmful emissions is no longer the goal of Tesla or a future value engine. What an incredible revelation.
Ironically, this investor call came the same day CNBC announced a new benefit for Tesla employees. A new low-interest loan program to help employees deal with loss of revenue due to lost wages due to "service interruptions for maintenance, repairs or unexpected shutdowns in Tesla's plants ".
Rather than trying to appease the downturn in production to keep employees on track, Tesla will be organizing a payday loan version that will result in employee indebtedness. What an excellent recruitment tool.
If production lines stop often enough to require a loan program, management knows that the demand is causing serious problems, resulting in a slowdown in production. Why are investors not being alerted as required by the SEC because of significant changes to the disclosure rules?
A major attitude change, based on inside information?
The terrible financial results of the first quarter (here) recently revealed seem to have shaken Tesla's senior management. Elon Musk, largely confident, was remarkably under control during the first quarter teleconference in April.
We are now witnessing a major shift in focus. Without any way of knowing for sure, what we are seeing on the outside seems to indicate problems of order, not only for the S and X models, but also for the 3 and Y models.
Here's what we know: at the end of the first quarter, Tesla had 10,600 units in transit to three main destinations; China, European Union and North America. If we make a uniform rounded distribution of 3,500 units for each of them, we can add some known facts.
We can safely assume that Tesla was able to maintain at least a manufacturing rate of 6,000 per week for all models or 25,800 units of production for April.
On May 1st, InsideEVs.com released its estimate of total deliveries made by Tesla in April, for a total of 11,925 units, all models combined. We should be able to assume that all US transit units in the first quarter are included in this number. This leaves about 8,400 deliveries from April production or older stocks.
According to the figures known for Norway, the Netherlands and Spain of 1,600 deliveries in April, we can expect another 3,000 for the rest of Europe in April. This gives us a European total of 4,600 units, but now we have to subtract the 3,500 units of transit cars from the first quarter. This leaves only 1,100 units delivered in April from current production or older stocks.
Ships can travel to China in about half the time. So let's be generous and double the number of deliveries from the EU to 9,200 for China. Subtract the 3,500 transit passengers in the first quarter and leave new April production deliveries in China to 5,700.
If we total the three zones, we get 8,400 + 1,100 + 5,700 for a total of 15,200 units. Using the April production of 25,800 units, we carried forward to May 10,600 units (all of which could be in transit). Is the new normal every month?
The management of Tesla may fear that Europe and China (due to shipping time constraints) will not be able to offset the drop in shipments to the United States, limiting deliveries to around 25,000 per month. These are not enough monthly deliveries to reach the minimum target of 360,000 for 2019 or generate sustainable profits.
While Tesla was able to increase shipments in North America by purchasing a hundred transport trucks, Tesla can not afford to buy its own ships. Tesla is limited to the available space and time of shipping companies and could be a significant impediment to the growth of shipments for the remainder of 2019 and beyond.
While Gigafactory 3 in China will mitigate shipping problems in Asia, a Chinese official seems to believe that production is not expected to increase until next year. Tesla already knows this, according to a recent Teslarati.com article.
In a statement to the Times, Feng Shiming, executive director of Menutor Consulting Shanghai, said:
"The pace of construction of the plant is too fast, which may pose some problems, such as insufficient equipment testing and staff training. The target could be reached early next year and, two or three months later, its model 3 could be marketed on a large scale. Tesla is ready not to produce mass production this year. Production in September is likely, "he said.
(underlined by the author)
Conclusion
Add that, incorporating the first-quarter figures, and the management of Tesla may have finally come to the conclusion that its current business model would not work. Production costs, sales, service, charging network, etc. are simply too high for the profits of new vehicle sales to be borne.
Another new source of income, but very doubtful and unproven, is now their solution to move society forward. The big question is whether Tesla really has the technology to make it doable? Can level 5 be achieved as planned in 2020 in front of all the other actors on the ground and deployed on a large scale? This is by far the most grandiose promise of Elon Musk.
In the meantime, Tesla will still need to borrow larger amounts to cover its losses and repayment of its debt. With the steady decline in shares held by major institutions, it will be interesting to see if these two new offers will be fully subscribed. Management's refusal to answer important questions from investors may not contribute to this effort.
As mentioned earlier, we are seeing a steady exodus of large institutional investors out of Tesla's stock, confirmed by the filing of 13 F with the SEC. Apparently, the Millennials take their place (here). Unfortunately, they were not investors when the dotcom bubble burst of 2000-2002 or would remember that it was the small investors who were left with this bag. We all know that history tends to repeat itself.
If Tesla is again subject to a significant quarterly loss pattern for the remainder of 2019, this new injection of funds could be cremated by the end of the year.
Disclosure: I am / we are short TSLA VIA OPTIONS. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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