Those who have been banging the drum about Tesla TSLA’s financial challenges received some vindication this weekend from a most unlikely source: Tesla’s own CEO, Elon Musk.
In an interview with Axios published on Nov. 25, Musk made a startling admission: Tesla was teetering on the brink of destruction earlier this year.
That is a big admission, one that throws a new light on previous statements (and lack of proper disclosures). And, while Musk is now once again presenting a picture that all is now well at last, Tesla remains a company dancing on the edge of ruin.
Fear the reaper
In the early months of 2018, Musk publicly projected extreme confidence in Tesla and the production ramp of the new Model 3 sedan. Yet, as it turns out, things were not going so well behind the scenes. According to Musk in his latest interview, the upstart electric vehicle company was staring death in the face as it tried desperately to accelerate production:
“Tesla really faced a severe threat of death due to the Model 3 production ramp. Essentially, the company was bleeding money like crazy and, if we didn’t solve these problems in a very short period of time, we would die. And it was extremely difficult to solve them.”
When asked about “how close” Tesla was to going belly-up, Musk explained further:
“Within single-digit weeks.”
For a company with mere weeks to live if it could not overcome a host of obstacles, Tesla was awfully quiet about the subject when communicating with investors and the public. That is strange -- and suspicious.
Very strange indeed
Musk’s statements to Axios are genuinely startling, given that, at the time of this near-death crisis, Tesla was claiming to be working rapidly through “production hell” while Musk himself stated emphatically that Tesla was financially healthy and rapidly approaching sustainable profitability.
On earnings calls in the first half of 2018, Tesla and Musk gave no indication of imminent crisis, nor did they ever file a “going concern” notice with their financials. Yet, if indeed Tesla was on the brink, such a notice ought to have been front and center.
The strangeness of Musk’s interview statements is compounded further when we consider that it overlapped with the supposed initial talks between Musk and Saudi Arabia’s sovereign wealth fund to take the company private at a significant premium. Musk did eventually announce a take-private action, but it quickly fell apart when it became clear that he did not have “funding secured” as he initially claimed, nor was he likely to be able to successfully carry out such a financial maneuver.
Ultimately, all he bought with the gambit was host of lawsuits and investigations, including a federal civil fraud, criminal investigations by the SEC and DOJ, and a raft of class-actions from burned short-sellers.
The plot thickens
This is a classic example of Musk’s brinkmanship in action. It also highlights quite clearly how Tesla’s stock price is unmoored from underlying realities. Not only is there extreme exuberance about the future of the company, but the company’s own statements leave out important details in order to paint as rosy a picture as possible.
It also calls into further question the results of Tesla’s miraculous third quarter, which saw the company post a surprise profit. If indeed Tesla was in trouble not long before the third quarter, which all empirical evidence suggested it was, then the sudden reversal of fortunes makes even less sense.
Verdict
Tesla is a company in deep trouble. A profit in the third quarter was a surprise to be sure, but it could only be engineered at the expense of succeeding quarters.
Tesla has burned through its high-margin order book and has had to begin selling lower-margin mid-range Model 3 configurations. At the same time, demand is likely to take a significant hit as federal tax credits are phased out over the next few quarters, and as new competitors enter the EV arena.
Tesla had one miraculous quarter after spending months on the verge of death. Looking toward the future, the deathwatch looks more likely to see repetition than the third-quarter blowout.
Disclosure: Short Tesla via long-dated put options.
