Tesla – Dave’s Not Here and Musk Won’t Leave
Elon Musk may not be going anywhere, but Tesla's investors sure are.
Good vibes sparked on Thursday for Tesla (TSLA) with news of robust August sales flamed out quickly on Friday when reports surfaced that CEO Elon Musk lit up a doobie during a live interview on YouTube Thursday night.
Not surprisingly, Tesla’s management turbulence continues–it’s lost two more key executives.
Musk may not be going anywhere, but investors sure are. Tesla stock opened Friday morning 20 points lower to $260 and the 5.3% senior notes slumped another 4 points to 83.4 (8.5% ytw).
Another week in Tesla Oz…
Tesla is gaining little traction so far in frantic efforts to rehabilitate the company’s shredded credibility with investors, especially with a Detonator in Chief in charge.
It’s two steps forward, then off a cliff.
First, the Good News:
An Ontario court ruled in Tesla’s favor versus the Canadian government, clearing the way for buyers to continue receiving generous EV incentives. “Several hundred” Model 3 customers who ordered from Tesla on or before July 11th and take delivery by September 10th remain eligible for rebates up to $14,000—a welcome boost for Tesla’s critical third quarter.
August US sales were robust. InsideEVs reported Tesla topped the charts, with Model 3 deliveries up 25% versus July to a commanding 17,800. Models S and X rebounded nicely with 2,625 (up 119%) and 2,750 (up 108%), respectively, versus weak July results, challenged only by Toyota Prius Prime with 2,071 (up 4%). Tesla now ranks 1st, 3rd, and 4th in year-to-date electric vehicle sales in the US.
But the bad news kept coming
It looks like Tesla still can’t consistently produce 5,000 Model 3s per week, its stated goal for the second quarter much less the 6,000 per week target Musk set for the third quarter. Electrek reported Tesla produced 6,400 cars the last week of August, but only 4,300 Model 3s.
This still indicates a healthy pace of production, though below levels sufficient to meet third quarter guidance.That’s a problem, since we’ve already seen Tesla’s desperate efforts to meet unrealistic targets produce disastrous results. Tesla put up factory tents and pulled round- the-clock shifts to finally produce 5,000 Model 3s the last week of June. Then 71% of those cars were undeliverable with serious issues that had to be “reworked,” driving up costs for the third quarter while also inflating Tesla’s burgeoning problems with quality control and customer service.
Tesla marks another first–first phase-outs of tax incentives for EV buyers. Source: InsideEvs
Tesla also hit the 200,000 unit sales mark, making it the first electric car maker to trigger the phase-out of the $7,500 US tax credit. This could pull sales from 2019 even as it dampens demand for its comparatively more expensive cars versus competitive rivals which will take much longer to hit phase-out production.Tesla marks another first–first phase-outs of tax incentives for EV buyers. Source: InsideEvs
The competition isn’t waiting for Tesla to get its act together. Mercedes-Benz unveiled its new EQC 400 4Matic, an all-wheel-drive crossover SUV soon to be launched as its first full production electric vehicle. The EQC will compete directly with Tesla’s aging Model X as well as the sexy new Jaguar I-Pace, BMW’s upcoming electric iX3 small SUV, and Porsche’s gorgeous all-electric Taycan—all priced similarly starting near $70,000.
Another headline grabbing lawsuit appeared, this one from storied short-seller Andrew Left, noted for helping expose Valeant Pharmaceuticals’ fraudulent specialty pharma scheme in 2015.Left accuses Musk of deliberately inflating Tesla’s stock price with his take-private fiasco in order to burn the shorts.
A new round of key executives exited, spooking investors already wary of Tesla’s persistent management turmoil. This included Tesla’s newly minted Chief Accounting Officer Dave Morton who left after less than a month—abandoning his $10 million new-hire stock grant–because he felt his concerns over Musk’s take-private scheme were not being heard or understood. I hear ya, Dave.
Elon is Tesla’s biggest problem, and one it’s least likely to solve.
Musk reignited his nasty and seemingly baseless attacks threatening the Thailand cave rescuer, as one does as a world dominating multi-billionaire who lives on the other side of the planet from his target. Just because he can.
Then as if to prove he really is, like, a totally cool dude,Musk shows up for a 3-hour interview Thursday night on a comedian’s show on YouTube and takes a toke.
“Do people get upset at you if you do certain things?” asks Musk. Um, yes. Yes they do.
(Source: The Guardian)
The stunt may burn up more than goodwill for Musk, because now the US Air Force is making inquiries. Marijuana is legal in California but illegal by federal statutes. Moreover, CNBC reports the US Air Force is concerned because it does business with Musk’s SpaceX company and “marijuana use is prohibited for someone with a government security clearance.”
Nevertheless, Musk probably isn’t going anywhere.
Don’t look for punitive action to rein in or even censure Musk coming from Tesla’s board or its shareholders or even the SEC any time soon, if at all. As I have observed before, Tesla’s entrenched board has and continues to fully support Musk no matter what he does. Tesla’s largest investors are mostly mutual funds that tend more toward cheerleading versus shareholder activism. T Rowe Price, Tesla’s third largest holder with a 7% stake, was also one of Valeant Pharmaceuticals’ early and most ardent fans and remained one its largest holders long after most investors had deserted the smoking wreckage. Then it sued Valeant for “running a “fraudulent scheme” that “destroyed billions of dollars in shareholder value.”
Finally, SEC probes take years to complete and even then I doubt Musk or Tesla will face significant penalties. Some legal analysts even suggest the SEC may steer clear rather than “hurt shareholders” just by investigating. That’s another way of saying the SEC already is overburdened and understaffed going after easier wins.
Tesla did announce management changes after the market closed on Friday, including the promotion of Jerome Guillen to President. Mr. Guillen is credited with creating the high-volume General Assembly line for Model 3 in a matter of weeks. It’s less clear that Musk will leave him alone to do his new, even more comprehensive job overseeing all automotive operations.
Musk, being Musk, told employees in an email on Friday:
“For a while, there will be a lot of fuss and noise in the media. Just ignore them. Results are what matter and we are creating the most mind-blowing growth in the history of the automotive industry. Even the Ford Model T, which held the world record for the fastest growing car in history, didn’t grow as fast in sales or production as the Model 3.”
So Tesla stock plunged to a five-month low and the 5.3% bonds went boom.
Overall, it was another bad week for Tesla—and it won’t be the last.
I remain concerned with Tesla’s inexcusably rash management and that the company still seems to be tracking below industry expectations and company guidance.
That means Tesla could become untenably pressured given its already fragile liquidity and precarious financial condition. If so, I have a plan. Look for more in-depth analysis along with my forecast for 2018-2019 results in my upcoming report.
Maintain “Underperform” on TSLA 5.3% Senior Notes due 2025; last seen at 83.4 (8.5% ytw; 560 bps)—down nearly 4 points points since my 8/25/18 report and down nearly 8 points since 8/15/18 when I initiated coverage at “underperform.” Still could see 3-5 points additional downside from here.
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