Tesla Is Falling and It Can't Get Up
Tesla stock is tumbling and its overpriced bonds are frozen in the headlights with nowhere to go but down. Deliveries are sputtering, and Elon's shiny objects don't seem to be helping.
Not Again
Tesla (TSLA) stock had another bad week, closing down another 7% to $675.50 on Friday. It’s now down 25% versus its January peak, hit just before Tesla disappointed with mixed results reported for the fourth quarter and a surprisingly foggy outlook for 2021 (see Tesla: Oh No You Didn’t on 1/28/21). The stock now is trading $20 lower versus prices seen before the stock was added to the S&P 500 Index on December 21st.
One reason for this week’s drop was reports that the company planned to halt production at its primary plant in Fremont for a couple of weeks due to reported disruptions in parts and supplies, like chips, which have been impacted by intense winter storms that engulfed much of the country in recent weeks. But CEO Elon Musk immediately scotched the idea when the stock took a dive upon the news.
That probably was welcomed by Tesla’s workers, who were told they would not be paid during most of the shutdown presumably because the company couldn’t, or wouldn’t spare the expense.
After all, as I have detailed over several years, Tesla’s effective available cash is dramatically lower versus reported. This means, for example, it can’t freely spend nearly half the $19.4 billion in cash reported as of December 31st:
Exclude $752 million in customer deposits, which Tesla doesn’t own;
Exclude $6.76 billion in cash held overseas, up $2.91 billion versus the third quarter. This cash is held mostly in China where Tesla’s bankers greatly restrict how much/what it can spend—and where borrowing increased in the fourth quarter even as it pooled more cash.
So even though Tesla collected another $5 billion selling stock for the quarter ($12.6 billion for the year) and paid off just $1.8 billion net in debt & leases, effective cash to spend at the parent company was up just $1.8 billion to $11.8 billion versus the similarly calculated $10 billion in the third quarter compared with $14.5 billion then reported in cash (see Tesla: The Sky’s the Limit…Until on 1/28/21). Half of that could be spent this year on capex alone.
But first, CEO Elon Musk spent most of that net increase a few weeks ago when he directed Tesla to buy Bitcoin (BTC-USD) for $1.5 billion. There goes a year’s worth of energy credit sales Tesla needed to cobble together a reported $720 million “profit” for 2020 instead of a net lost of at least $860 million (see Tesla: Oh No You Didn’t on 1/28/21 and Tesla to Sell Another $5 Billion in Stock—Might As Well on 12/8/12).
Just a bit of fun or, as I see it, more arrogant recklessness from an out of control CEO which worsened Tesla’s already significantly understated financial risks and its substantially overstated balance sheet stability. Either way, the SEC is likely to take in interest in how Tesla accounts for this incredibly volatile intangible asset, especially since Tesla also wants to accept Bitcoin down the road as payment for its cars (we’ll see about that).
It didn’t help that Elon Musk also may have peaked the SEC’s interest about potential market manipulation related to his bizarre love notes on Twitter about Dogecoin (DOGE-USD) which fueled astonishing spikes in DOGE prices at about the same time Tesla was buying its rival, Bitcoin.
Remember, Elon “does not respect the SEC.” His last tangle with the SEC came after his “joke” in August 2018 that he had “funding secured” at $420 a share to take Tesla private, a stunt which cost Musk and Tesla each a $20 million fine and $13 billion in evaporated market cap, then a massive loss to investors (see Tesla’s New Take-Private Plan: Never Mind on 8/25/18 and Tesla Fought the Law and the Law Won on 9/28/18).
The result of all this is that Tesla’s stock has lost two months of gains and market cap is down by more than $200 billion. This means Elon has slipped below Amazon’s Jeff Bezos as now only the second richest man in the world.
So show a little compassion, Tesla factory workers, Elon has suffered enough.
That’s Not the Worst News
Tesla is two months into the first quarter. Slowing production now for two weeks into the last month of the quarter could understandably impact available inventory at a critical time just as Tesla launches its typical late quarter sales push to make its delivery numbers.
Unless production parts & supply strain is not really the problem, and that would explain why Tesla was able to abandon the idea after just 2 days.
I suspect Tesla wanted to slow production out of concern over shrinking demand, as I warned about again in Tesla: Don’t Drive Angry on 2/8/21).
Early reports indicate January monthly deliveries were disturbingly weak in key markets. Ev-Sales.com logged China Model 3 deliveries at a weaker than expected 13,800, with Model Y launching poorly at a paltry 1,641. This explains why Tesla continues to have excess inventory of Made-In-China (MIC) Model 3s available to ship to Europe.
Not that they are needed there either. January deliveries in Europe for all Tesla models combined trailed even the bottom 20-ranked Opel Corsa EV which sold 1,935. Model 3 Europe deliveries were down about 6% versus weak results last year to just 1,499, trailing the top ten by 1,000-2,000.
We don’t get monthly numbers for US deliveries but recall, as I have noted in previous reports, US sales have tended to track trends in Europe:
Tesla’s additional price cuts just over a week ago on top of aggressive rounds in January imply February trends may be little improved, as I projected (see Tesla: Don’t Drive Angry on 2/8/21). Tesla even introduced—a quickly withdrew—a sub-$40,000 Standard Range Model Y, just like it did last year with its suddenly offered and quickly aborted $35,000 Model 3, affirming again how quickly margins hit the skids on lower-end models.
I am skeptical further price cuts do the trick because, as I have noted the past three years, Tesla has cut prices aggressively every quarter since 2018. The trouble is that price is only one of Tesla’s competitive problems.
Buyers in all markets are increasingly wary of Tesla’s long running quality and reliability problems, as I have discussed in multiple reports. Problems in manufacturing and service don’t go away, even when buyers do (see why in The Trouble With Tesla’s Arrested Development on 7/17/19).
Buyers also don’t get what they pay for. Edmunds reported a couple of weeks ago that “every Tesla we've tested has failed to hit its EPA range estimate.” This confirmed similar reports in previous years that Tesla’s range estimates are persistently inflated.
And Tesla’s response to the recently forced recall of of 135,000 defective touch screens which can go blank while driving and potentially cause a crash? Its touchscreens are only expected to last 5-6 years anyway, half the vehicle’s projected useful life.
China regulators and several associated government authorities came down hard on Tesla—again—just three weeks ago, as reported in Global Times:
“The automaker was summoned for several quality control complaints that arose in recent months, including unexpected accelerations, battery fires and abnormal over-the-air (OTA) upgrades, according to a statement released by China's State Administration for Market Regulation (SAMR) on Monday.”
“…The US automaker has faced rising public scrutiny over its quality controls, and it has conducted several rounds of recalls due to faulty parts. On Saturday, Tesla announced a fresh recall involving up to 36,126 imported Model S and Model X vehicles in China because of touch-screen failures.
In October last year, Tesla recalled 48,442 vehicles in China over faulty front and rear suspensions.
Tesla has been widely accused of arrogance in dealing with safety issues in China. In late January, a Tesla Model 3 erupted in flames in Shanghai, to which Tesla only issued an initial response saying it was because of collision damage to a high-voltage battery, according to media reports.
Several accidents reportedly involving out-of-control Tesla vehicles have taken place across China, and in each case Tesla has insisted that there was no vehicle failure.
"I've never seen such an outrageous lack of responsibility from a company, especially regarding such serious safety issues," Feng said. "It is high time that the authorities stepped in and issued some warnings against the company."
Feng also said that Tesla has been avoiding its responsibility by fixing some of its software loopholes through OTA upgrades, without reporting this situation to market regulators.
In March, Tesla drew criticism after it reportedly downgraded components of its first batch of Shanghai-made Model 3 vehicles, replacing the promised new control chips with an older version. Tesla later said that this was done due to supply chain disruption during the pandemic.”
Regulators summon Tesla over consumers’ quality complaints, urged to follow laws, Global Times, February 8, 2021
This describes Tesla’s track record in US-made cars for at least three years, particularly Model 3, cars which it launched into Europe and China in 2019 and changed little to create Model Y.
MIC Model 3s have been problematic from the start in January 2020, as I projected given even less quality control and management oversight at the Shanghai plant. And since October Tesla has been shipping them to Europe where they compete with now dozens of some of the best-made and well-serviced cars in the world, supported by strong, credible automakers.
Buyers have noticed.
Tick Tock
I still estimate roughly 154,000 deliveries for the first quarter, down 15% vs the fourth quarter and up 74% versus Q120 as incremental growth from Model Y and China offsets falling same-store sales in the US and Europe. This indicates nearly 768,000 (up 54%) for the year. My estimates are well below market consensus.
At the rate the first quarter is going, even my low-ball numbers may prove too generous. It looks like Tesla may need to generate 55-60% of deliveries for the quarter in March.
The rest of the year seems little better. I continue to assume erosion in the US and Europe for Models 3, S, & X, with primary growth from Model Y in the US, Europe, and China, and stalling MIC Model 3 as MIC Model Y takes hold. There’s an increasing chance Model Y sales fade faster than the market expects in the second half of the year, similar to trends I have tracked with Model 3. I assume only modest sales at best from Cybertruck and Semi-Truck launches later in the year, if at all.
My full year estimates are unchanged, with revenue indicated at $42.2 billion (up 72%) reported EBITDA at $7.5 billion (17.8% margin), GAAP EBITDA excluding unusual/nonoperating & other items at $3.2 billion (7.8% margin), and leverage on unvarnished EBITDA near 5x (see attached model).
There’s a chance for upside to my estimates if the US expands energy credits later in the year to encourage sales. By how much is not clear, as it also would help Tesla’s competitors like General Motors (GM), perhaps even more.
Tesla's 5.3% senior notes due 2025 are down slightly since my last report at 104 (2.1% ytw; 203 bps), offering no credible upside versus potentially significant downside. The bonds remain excessively valued with yield tighter by 220 bps versus the BoA High Yield general index even though Tesla is a weak B3/BB- issuer. Pricing also indicates a meager 81 bps per turn of leverage on my estimated 2020 reported EBITDA and an appallingly low 41 bps per turn of leverage on core operating—unvarnished—EBITDA. Maintain "Underperform."
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