In August 2018, Elon Musk indicated that Tesla could be taken private at US$420 per share, a tongue in cheek nod to cannabis culture. “Funding secured,” he tweeted.
This did not end well, leading to a federal lawsuit and his removal as Chairman for misleading investors.
That ‘$420’ quip feels a long time ago now, with Tesla currently left in a haze of debt, product safety concerns and a share price that has slumped some 40% from prior highs. A seemingly never-ending series of challenges face the electric vehicle (EV) manufacturer, which has been under the cosh to meet quarterly sales targets and source new injections of cash. Wall Street bulls appear to have had their faith tested to new levels; the bears argue a reality check was just a matter of time.
That ‘$420’ quip feels a long time ago now, with Tesla currently left in a haze of debt, product safety concerns and a share price that has slumped some 40% from prior highs
As of 24 May 2019, Tesla’s stock price hovered around US$191—not much higher than valuations seen during the first quarter of 2014. Adam Jonas, an analyst at Morgan Stanley who has watched Tesla closely for years, recently suggested that the automaker’s stock price could plummet to just US$10 in a worst-case ‘bear’ scenario.
Well-known for his optimism around Tesla, Jonas has inadvertently achieved cult status as a ‘Tesla bull’. He even lays claim to a parody Twitter account: ‘Bullish Adam Jonas.’ The latest downgrade is an about-turn from previous sentiments, and also illustrates the challenge of making electric vehicles (EVs) at scale in the modern automotive industry.
Absolute unit of a slump
In a call to clients hosted on 22 May 2019, Jonas explained how the investment bank’s outlook for Tesla had deteriorated. Even as recently as December 2018, “Tesla was seen as a growth story,” he reflected. “Today, it’s seen more as a distressed credit and restructuring story.”
This change of tune follows several years of promising product launches and a generally positive vibe from the investment community. Back in August 2015, Jonas had increased Morgan Stanley’s price target for Tesla from US$280 per share to a staggering US$465, heralding the brand’s ‘unique position’ to lead in shared, autonomous and electric cars. Following the reveal of the Model 3 in April 2016, Jonas noted that while Tesla may not have disrupted the traditional automotive industry to the degree that had been expected, “we are now getting a feeling that this may be starting to change.”
For those of us who always thought Tesla’s valuation was absurd, this is just an overdue correction with further to go
Then came first mentions of the Tesla Semi in July 2016, with pre-orders for the all-electric HD truck soon coming from big names in freight such as UPS and Budweiser producer, Anheuser-Busch. By November 2016, however, Jonas cautioned that reservation holders for the Model 3 should be prepared to wait longer than expected, with production targets deemed somewhat lofty. This would prove a common topic in years to come.
In December 2018, the stock price began a sharp and prolonged decline, moving from a high of US$376 that month to around US$190 over the course of just five months—equivalent to a decline of nearly 50%. “For those of us who always thought Tesla’s valuation was absurd, this is just an overdue correction with further to go,” noted Jonathan Storey, Director of industry consultancy Automotive Reports, and author of Automotive World’s ‘Strategy update: Tesla’.
What has hit Tesla so hard?
There are a number of reasons why the investment community has grown cautious around Tesla’s performance in 2019.
A handful of serious—some fatal—crashes have drawn criticism of its driver assistance feature, Autopilot. Then there are issues with the batteries that power its vehicles; a couple of recent fires have reignited past problems seen with its electric powertrains. But while product issues are not to be ignored, it is production that could prove to be the problem. In short, the automaker is haemorrhaging cash, and is not selling enough cars.
“I feel like the priority is missed deliveries, and what they might indicate about demand going forward,” said Karl Brauer, Executive Publisher for Autotrader and Kelley Blue Book. “Accidents and fires can be addressed through updates to design and technology, but a shift in the market that puts downward pressure on unit sales is something beyond Tesla’s control.”
Accidents and fires can be addressed through updates to design and technology, but a shift in the market that puts downward pressure on unit sales is something beyond Tesla’s control
Indeed, Morgan Stanley’s Jonas highlighted demand as being “the first domino” in a line of factors that could see the share price continue to tumble. Based on Q1 results, annualised vehicle deliveries could be as low as 250,000 in 2019—far below Tesla’s outlined target of between 360,000 and 400,000.
A mounting trade war between the US and China is also expected to make such targets tough to meet. “If the company can ramp up production, sales and profit in China, that could counter any drop off in US demand. But making all the Chinese pieces fit together is far from certain,” mused Brauer. Or, as Jonas put it: “Could there be a worse time to depend on China to sell robot cars?”
A leaked email, sent from Elon Musk to Tesla employees, recently claimed that the company would in fact beat its previous record for deliveries, which was seen in Q4 2018. “If we rally hard, we can do it!” it read.
Money, money, money
Then there is the issue of cash flow, not an ideal complement to sky-high spending. In May, another email to staff described a ‘hardcore’ cost-cutting scenario that would be enforced, with the company burning through US$700m in the first quarter alone. “The rate at which it is burning cash has left investors wondering how much longer it can operate like this,” said Anna-Marie Baisden, Head of Autos, Macro Research at Fitch Solutions. “Questions over whether Tesla can produce at volume and be profitable still remain.”
In his call to clients, Jonas suggested that Tesla’s manufacturing outfit was designed for significantly higher production levels, which would make dwindling demand all the worse: “[Tesla] built this hulking physical infrastructure to supply more like a million cars a year, not 350,000 cars a year. That’s what’s creating this bleeding.”
The rate at which it is burning cash has left investors wondering how much longer it can operate like this
Storey of Automotive Reports holds a similar opinion. “The company is a long way from showing it can achieve a sustainable profit,” he said. “The departure rate of senior executives is also concerning.”
Indeed, 2018 proved to be something of a revolving door for senior roles, with VP of Communications, Chief People Officer, Chief Accounting Officer, VP Global Supply Management and Senior Director of Production and Quality all finding pastures new within September alone. The trend has continued into 2019, with a marquee exit being Deepak Ahuja, one of Tesla’s longest-serving executives, who retired in March 2019. Other notable departures include two separate General Counsels, a Senior Director of Engineering, and directors of Growth, Global Security and Global Communications.
Tesla’s story is a curious account of how a company has continued to secure funding and ignite enthusiasm for new product launches, despite clear financial concern and troubled leadership. Bear in mind that Mark Fields was ousted as Chief Executive of Ford Motor Company in May 2017 following a widely lambasted drop in share price under his leadership. Fields appeared to be positioning the company for ‘future mobility’, alas a lack of emphasis on manufacturing efficiency was deemed a crucial error. Ford stock hit US$10.87 per share on May 19, down from just shy of US$18 per share—a decline of just under 40%—when then Chief Executive Alan Mulally retired in the summer of 2014.
From smoking cannabis on camera and categorising legitimate analyst questions as “stupid”, to furnishing his private Twitter account with memes and joking about drivers using Autopilot to film porn—at a time where several Tesla crashes were in the headlines—Elon Musk is not the archetypal automotive industry veteran. And that he is, having been at the helm of Tesla Motors since 2003, longer than Dieter Zetsche has held the top job at Daimler.
Vehicle manufacturing is inherently capital intensive; throw in the added complexity of producing batteries, pioneering in driver-assistance technology and juggling activities such as space travel and solar power, and it is not surprising to see Tesla struggling
The promise of affordable, highly automated EVs has largely proven enough to keep apologists on side. “Our Tesla [stance] is hard to live with at times,” Jefferies analysts noted on 24 April 2019, “but we see value in Tesla’s EV/connectivity technology and experimentation—no matter the management style—and remain confident there is a path to sustained profitability.” A recent investor note from ARK Invest suggested that Tesla’s stock could hit between US$560 and US$1,200 by 2023. The opinion is not shared by many.
“Even those who had much greater faith in this stock have had that faith tested, not only by recent events but perhaps more by the growing perception that Elon Musk does not have a realistic vision for the company, nor the skill-set to manage it properly,” said Storey. “Tesla’s valuation has been based on an assumption of incredible success. I use the word, ‘incredible’ in its original sense, meaning not believable, so a return to a more sane valuation was always on the cards.”
With all the talk of bulls and bears, it is important to remember that the automotive industry itself is a challenging beast. It is far from business as usual today, as pressure to cut harmful tailpipe emissions and reduce the shocking frequency of road deaths has forced the world’s major automakers to invest eye-watering sums in new, unfamiliar technologies.
Vehicle manufacturing is inherently capital intensive; throw in the added complexity of producing batteries, pioneering in driver-assistance technology and juggling activities such as space travel and solar power, and it is not surprising to see Tesla struggling. While Volkswagen, General Motors and Toyota et al are looking to the future for long-term stability, Tesla may well have to turn its attention to the present to ensure survival.
This article appeared in the Q3 2019 issue of M:bility | Magazine. Follow this link to download the full issue.