The heat on Elon Musk is approaching full boil.
Tesla is low on cash. A $920-million debt payment comes due in March. Demand for Tesla cars appears to be softening. Thousands of workers just got laid off.
On Wednesday, Tesla is set to release fourth-quarter and full-year earnings data. Musk warned last week to expect a lower fourth-quarter profit. The next quarter might not be profitable at all, he said. The company scored a healthy profit last quarter, but that’s looking like an aberration.
After the earnings release, Musk will hold a conference call with stock analysts. The questions historically tended toward softball when they weren’t weird. (“Elon, who do you think would be a more formidable competitor over time, BMW or Amazon?”)
But Wall Street seems to be turning sour on the stock. In late 2018 one of Tesla’s biggest investors, the T. Rowe Price family of mutual funds, trimmed its Tesla holdings by nearly 50%. Analysts’ sell recommendations outweigh buy recommendations on Tesla stock. The stock closed down 66 cents, or 0.2%, to $296.38 on Monday, down from its 52-week high of $387.46.
This time around, analysts might be asking questions that include:
Is demand heading for a cliff?
Musk’s profit warning indicates demand problems for the Model 3 — and the high-end Model S and Model X too.
The Model 3 was advertised three years ago as a $35,000 car — $25,000 with federal and California incentives. But that car doesn’t exist, and Musk has said it’s impossible to turn it out without losing money until he gets costs in line. If Tesla does plan to introduce a $35,000 car, it hasn’t yet offered a hard date. Some wonder, given continued high battery prices, whether it will ever be possible.
With options, a typical Model 3 sells for nearly $60,000. Musk might be asked how much demand is left in the U.S. at that price, and how many higher-priced Model 3s he can sell in Europe and China before he hits demand problems there.
He might also be asked about demand for the Model S and Model X cars, both priced over $100,000 with even a modicum of options. After the company laid off at least 2,500 full-time workers last week and fired untold numbers of independent contractors, it said “production hours” for the S and X would be cut. Asked whether the number of cars produced would be cut and by how much, Tesla declined to say one way or the other. A sharp analyst might get specific with Musk on this question.
Do you have enough cash to pay your debts?
Tesla owes bondholders $920 million in March. Because the bonds are convertible, the debt could be transformed into Tesla stock, saving Tesla hundreds of millions in cash.
But the conversion price for the bonds is $360 a share. Right now the stock price isn’t close. The Monday close of $296.38 is down 15% since Musk announced layoffs and declared Tesla cars are too expensive for most people.
Tesla’s stock is highly volatile, and Musk could well announce some unanticipated good news Wednesday that could send it soaring again — secured financing for a planned China factory, for example.
As for the bonds bill coming due, “I expect they have to pay that off via cash in full now, unless they refinance it” with the convertible bondholders, said David Whiston, a stock analyst at Morningstar.
Can you raise capital?
Tesla could wipe away fears that it’s running out of money and cast off doubts about its ability to finance ambitious new products (semi truck, crossover, pickup truck) by tapping the market for new equity. Its $51-billion market value and rabid fan base indicate the demand for new stock is there.
So why hasn’t Tesla done so? In early 2018, Musk said, “I specifically don’t want to.” Cash flow would take care of all future funding needs, he said.
In October’s third-quarter earnings call, he hedged a bit: “We do not intend to raise equity or debt, at least that is not our intention right now.”
But many short sellers believe Musk hasn’t raised capital because he can’t. The company, they note, is under investigation by the U.S. Justice Department. Could that affect Tesla’s ability to push stock registration paperwork through the Securities and Exchange Commission? Would Tesla have to reveal investigation details in any offering?
Musk has made clear, however, his disdain for the SEC. “I do not respect the SEC,” he told “60 Minutes” in December. “I do not respect them.”
A Tesla spokesman said “there are no impediments from the DOJ preventing Tesla from raising capital.” Beyond the SEC’s fraud settlement last year with Musk, the spokesman said, “to our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred.”
How will you fix quality and service?
The Model 3 is encountering serious quality problems, including water leaking into the trunk, batteries that won’t charge in frigid weather and bumpers that fill up with snow and fall off the car.
Perhaps that’s to be expected in a new line of cars from a young company with little experience building automobiles. But Tesla owners are taking to social media in ever-larger numbers to complain about unreturned calls, unavailable parts, weeks-long waits for basic repairs and the company’s refusal to make repairs under warranty.
Stan Zalewski bought a Model 3 on Dec. 23. A month later the bumper fell off. (He’s not the only one.) An architect and founder of Square Peg Studio in Toronto, Zalewski told The Times that three missing bolts “caused the bumper to act like a sail scooping up air and rain and possibly some snow. This caused the next set of mounts to stress until the metal fatigue caused them to break. The bumper dropped to the road level and when it hit the first smallest imperfection in the road it caught and sheared the entire rear bumper off as well as damaging the rear-quarter panels. It’s a mess.”
He said a Tesla rep told him the problem wouldn’t be covered under warranty. “I like the Tesla approach to transportation, and we want to continue driving Teslas, but their service is horrible,” Zalewski said. Tesla had no comment. But after this story published Tuesday morning, Zalewski received an email from Tesla promising to fix the problem under warranty. “That took a lot of kicking and screaming,” Zalewski told The Times via email. “I want this to be a successful company and I want to be treated fairly by them.”
Musk rarely talks about Tesla’s quality and service problems. He has acknowledged a shortage of service centers. In October, he tweeted, “Just reviewed Tesla’s service locations in North America & realized we have major gaps in geographic coverage! Sorry for this foolish oversight. Tesla will aim to cover all regions of NA (not just big cities) within 3 to 6 months.”