Nikola’s Troubles And Tesla’s History Shadow Battery Day
Nikola’s Troubles And Tesla’s History Shadow Battery Day
Nikola’s troubles are not new to Tesla; Reviewing years of Tesla-hyped major events & grand promises that failed to materialize as advertised; What I expect on Battery Day
Tesla Motors (TSLA US) could send a message to embattled Nikola Corp (NKLA US): been there, done that.
Nikola's founder and CEO Trevor Milton has stepped down after he and his company have been accused of seemingly everything from dicey accounting to promoting technology the company doesn't have to fake product demos designed to deliberately mislead investors—charges now being investigated by the US Securities and Exchange Commission (SEC) and Department of Justice (DOJ).
Every single allegation and more, plus the specter of ongoing investigations by the SEC and the DOJ, also describe Tesla as run by CEO Elon Musk.
Keep this in mind as we await what he and Tesla may promise tomorrow in the company's eagerly awaited "Battery Day" presentation to investors.
Serious Consequences Are For Other People
Like Milton, Musk was forced to step down as chairman of his own company as part of pleading guilty to securities fraud after he lied in August 2018 about a fake buyout of Tesla with "funding secured" (see Musk Fought the Law and the Law Won, So What? on 9/29/18). Musk cost Tesla investors more than $20 billion in evaporated market cap as the stock plunged after his stunt was revealed. However Musk, one of the richest people on the planet, paid only a modest $20 million fine.
A key difference between Tesla and Nikola seems to be that Nikola's board apparently exercised its fiduciary responsibility to protect the company and its investors from a damaging and potentially corrupt CEO. More importantly, Nikola's board had the power to make its actions stick, "encouraged" no doubt by General Motors Co (GM US) which is Nikola's new $2 billion best friend.
Tesla's sycophantic Board has been virtually useless as Musk defied the SEC, US Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), the National Transportation Safety Board (NTSB), court orders and law enforcement, and so on—with impunity.
Meanwhile, Tesla's cars and solar roofs have a disturbing propensity to catch fire. At best they remain plagued with persistent quality and reliability problems. Tesla's factories are more dangerous for its workers versus plants operated by all its top competitors combined (see The Trouble With Tesla's Arrested Development on 7/17/19). Regulators are investigating ongoing Autopilot-related injuries and deaths and Smart Summon which Consumer Reports declared an expensive "science experiment" that was "glitchy" that worked "intermittently, without a lot of obvious benefits for consumers."
Promises, Promises
Bloomberg published a handy compilation of Musk's big promises unveiled with fanfare over the years that failed to materialize as advertised, including the abandoned Battery Swap, Solar Roof (displayed with nonfunctioning tiles), and the now 3-year delayed (and counting) Semi truck and Roadster 2.
Let's not forget CyberTruck, unveiled with "bulletproof" glass that shattered, a proclaimed 3,500 pound payload capacity that nevertheless tipped sharply when loading an 800 pound ATV, and a bogus video showing it pull an unloaded and substantially lighter F-150 uphill (see Tesla: Into Thin Air on 1/15/20).
Battery Day is Tesla's first investor event since Autonomy Day on April 22, 2019. That's when Musk proclaimed that Tesla would have "over a million" self-driving robotaxis, advertised as a lucrative proposition for Tesla and its car owners, "feature complete at a reliably level that we would consider that no one needs to pay attention," and on the road by July of this year "for sure."
Interestingly, "robotaxi" did not appear in the prospectuses for the $2.75 billion in stock and bonds Tesla then sold to investors only a week after Musk made that promise because the company sorely needed cash following dismal first quarter results (see Tesla: When a Spartan Diet + $2 Billion Isn't Enough on 5/17/19). Perhaps that's because robotaxis, like fully autonomous Teslas, don't exist.
So What To Expect On Battery Day
Tesla has been widely expected to announce a larger 4575 battery cell versus the 2170 used now in Models 3 and Y, which could reduce the volume of cells in a battery pack by 80%.
A larger battery also generates substantially more heat, which is harder to dissipate given its higher resistance via higher surface to volume ratio compared with smaller batteries, which is why these aren't used now. Tesla addresses the problem by incorporating its patented tabless electrode and Maxwell Technology's dry-coated electrode process to reduce resistance while increasing conductivity, plus likely some change in battery chemistry. Theoretically, these can reduce manufacturing complexity and cost while yielding a reasonable increase in performance, assuming Tesla can solve many inherent problems with the concept and execution—which is far from guaranteed.
Evolution to some version of cell-to-pack production versus current cell-to-module-to-pack production. In short, battery cells are built directly into the main battery pack. The goal is to reduce weight as well as manufacturing complexity and cost; however, this idea also introduces increased performance variability across the entire battery pack with individual cell power variances and failures.
Tesla's version of the "million mile" battery, which multiple battery makers like Tesla supplier CATL (A) (300750 CH) also are working on.
General performance efficiencies which increase overall production line speed and reduce cost.
Talk Is Cheap; Everything Else Can Be Prohibitively Expensive
It really comes down to execution, timing, and funding—all will be challenging for Tesla, which burns far more cash than it reports and has less cash actually available to spend than indicated. That's why it has started funding even capex with leases (see Things People Believe: Flat Earth, Faked Moon Landings, and Tesla $2100 on 8/23/20).
Meanwhile a host of rivals also are working on breakthroughs in battery technology and production, many far more credible and better capitalized than Tesla.
Musk did confirm my concern that whatever Tesla announces will not likely grow revenue or profit any time soon, if at all (see Things People Believe: Flat Earth, Faked Moon Landings, and Tesla $2100 on 8/23/20):
This sounds like the perpetual "insane demand" Tesla has promised for years. We'll see, but serious competition emerging in all its markets plus Tesla's persistent struggle to sustain same-store demand suggest otherwise. Meanwhile it looks like at least two years before Tesla expects to be in full production at some commercial scale with its battery-making enterprise. I suspect this is ambitious, even for Tesla.
Stay Tuned.
Tesla's pricey bonds are down slightly since my last report at 103.75 (3.91% ytw; 364 bps). Yield is 162 bps tighter versus the BoA High Yield general index even though Tesla is a Caa1/B- issuer. Pricing also indicates a meager 91 bps per turn of leverage on my estimated 2020 reported EBITDA and an appallingly low 52 bps per turn of leverage on core operating EBITDA. Such levels are priced for perfection with no margin for disappointment, and when Tesla finally hits reality we're looking at a trail of tears. Maintain "Underperform."
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