Tesla Is Facing a Crucible
bloomberg.com
bloomberg.com
The WSJ article it refers to is called "Tesla’s Make-Or-Break Moment Is Fast Approaching":
The CNBC article it refers to is called "Tesla employees say automaker is churning out a high volume of flawed parts requiring costly rework":
https://www.cnbc.com/2018/03/14/tesla-manufacturing-high-vol...
The Bloomberg article isn't bad, but it's so generic that the discussion is generic as well (Tesla in general, short selling in general). That's the main trouble with articles that don't contain enough factual fiber.
They had the same production problems on the roadster, the Model S, and the Model X. Each time, the new vehicle was a “make or break” for the company. Each time, there were reports of how these production problems would sink the company. The company never sank. Tesla is now apparently “good” at making the Model S and Model X. I always assumed they would have similar nightmarish production problems with the Model 3, so all of these reports are sort of expected for me. But I also know that Teslas are extremely popular in Silicon Valley, where I live. That to me indicates that those with the means really like the cars. So it stands to reason that once they are good at making an affordable car, they’ll sell like hot cakes.
Musk mentioned recently that two things really stress him out: Artifical Intelligence and what to do about the risks is poses for humanity, and the Model 3 launch. I still have a lot of faith that Elon can make it happen.
And personally I really want Tesla to succeed. I think a lot of other people do too.
The company refreshed its financing.
This is always possible, until it isn't.
> That to me indicates that those with the means really like the cars.
Cashflow is no respecter of brand power.
Tesla owners seem to be pretty forgiving of quality issues so far. We'll see how well that holds up.
Yes, when you can get to the point where cash changes hand (this may be a very different moment from the "sale"). If cash shows up too late, then it doesn't matter how much demand there is, the game is over.
Endings from cashflow crunch can be very abrupt. A very dangerous time for many companies is under conditions of growth, because very often your outgoing cash happens now and your incoming cash comes later.
Tesla has to pay its employees each month, has to pay its suppliers on time (or lose them), pay its utility bills etc etc. The outgoing cash does not stop going out. But the bulk of the cash comes in only when they can hand a car over. And that's not happening very fast right now. The monthly outgoings per-car appear to be negative.
I think Musk persona and SpaceX makes many want to bet on high risk but high gains project. I wonder how Tesla stock did after the dual rocket landing.
Tesla's production woes are a serious problem. My i3 lease is up in a couple of months and I can't even consider replacing it with a Model 3, since the end of the reservation line is years out.
Choosing January and February is not cherry picking because Tesla is ramping up production of the Model 3. That said, I acknowledge that the Bolt may have some seasonal effect that greatly increased sales at the end of last year when compared to the beginning of this year. Let's expand the January-February window back another month to account for that. We get 6,993 Model 3s versus 5,828 Bolts. No longer over 2x but still clearly outselling the Bolt.
I am bearish on Tesla, but I never thought they would get this far, so obviously I've been wrong before. My suspicion though is if Tesla isn't self-sustaining before the next economic downturn, they're fucked.
Bolts are compliance vehicles, sold by GM to meet fleet fuel efficiency and emissions requirements. Selling Bolts at a loss enables them to continue selling larger vehicles which actually turn a profit. Hopefully in a few more years battery costs will drop enough to make electric cars profitable in their own right.
It's a failure because Tesla made financial bet that they deliver high volumes of Model 3. It does not matter if Model 3 is good car and customers love it. Tesla must ramp up their production very fast or Tesla runs out of cheap money.
Tesla has no problems with customers love the car with passion. It's the investors who will choke Musk to death later this year if he has to ask more money to continue with struggling production. He will get the money but it will have high interest rate and Tesla stock will come down 20-50 percent.
Currently Tesla is producing 20% of it's target. Their production curve is not growing steeply enough. In fact it's slowing down.
[0] https://arstechnica.com/cars/2018/02/tesla-loses-another-675... "Tesla loses another $675 million in Q4, its biggest quarterly loss yet"
As of now, however, these bonds (1.8bln, issued last August) are trading underwater [0]. They will probably tap the market once again this year, and we will see what happen.
[0] https://www.marketwatch.com/story/teslas-junk-bonds-are-trad...
[1] - https://www.bloomberg.com/news/articles/2018-01-31/when-it-c...
Tesla is burning $4.2 billion per year now.
Where is this number is coming from? Their 2017 loss was around 2 billions, half of what you say.
Model 3 is not small volume luxury car as previous models. They are investing wast sums for large scale production. Burning trough vast amounts of cash is OK only as long as the production volume ramp up really happens in limited time frame and quality and recall numbers are similar to Audi 4A.
Tesla must ramp up the production volume within a year or Tesla is financially in the ropes.
If Tesla pays back debt $1000 for every car it sells. It must sell 4 million cars to pay this year's projected cash burn. Tesla made a bet that it can become large car manufacturer with Model 3, there will be no second changes.
Historically, this does not count for much. Business history is littered with the bones of infallible stars that just needed a little cash to tide them over.
For me, an EV is so much better because I can charge every night and I won't have to go anywhere to fill up my tank ever again.
Another big reason is that I don't buy new cars. So for an EV to make sense for me it would need to be a used one, at least 5 years old, and still have useful range and battery life.
If you're commuting hundreds of miles per day, my heart goes out to you regardless.
But being industrial company, Tesla is not solely about making something people want. It's about making it on scale, and showing profit.
So far, each model Tesla made meant more debt on balance sheet, and bigger quarterly losses. Once they break this trend, they are golden. But this moment is not yet, and not even on the horizon, meaning another capital rise this year.
That, instead of a sound financial analysis, seems to be the cause of your bullish position. I hope you’re not calling what you’re doing with your money “investing”.
We don't want snark—it's both a poison and a fertilizer. I'm dismayed to see that you've posted uncivil comments in the past as well.
Model 3 is completely different animal. Learning from history does not help here. Model 3 is 'entry level luxury' similar to Audi A4 and BMW 3 Series.
Tesla is very creative and innovative in every level, not just in their technology. Their financial innovation has finally reached it's limit with Model 3 and it's the breaking point. They can't afford large setbacks or partial delivery and gradual development over the years. They are running out of cheap money.
Tesla is leveraged to the gills and there can't be another year or two until delivery or Musk loses the company and some other car maker or PE firm buys them cheap and finishes the product. I wouldn't be surprised if Tesla is GM or Toyota brand within next five years.
For me, this puts the cart very much before the horse. Once they're good?
Making an expensive car is much, much easier than making an affordable one. The fact that they previously struggled with making an expensive one could just as well be a sign that their process improvement and cost reduction skills just aren't good enough to play in the big leagues.
Their being at 15% of projected output sure doesn't conflict with that; if they learned a lot from S and X, I'd think they'd be doing much better.
People forget just how bad the Model X launch was. It was a complete disaster. They had I think literally three of them ready for launch and then total silence for weeks. Then took months to get any sort of small run volume off the ground.
And because people have totally forgotten about that, people will probably totally forget about just how (comparatively mildly!) bad the Model 3 launch is going. It will stutter for a year, and in three years everyone will want one.
I lived through my dad owning 4 Jaguars, totally inexplicably. One of them he carried around a box of brake fluid because he had to add a little each day. If a car is that special to you, you just mentally set aside production issues. Electric cars are even more special.
Enzo Ferrari probably never said the apocryphal quote: "I don't care if the door gaps are straight. When the driver steps on the gas I want him to shit his pants." But for a big demographic its essentially true.
So Tesla will make it out of this year, and then everyone will forget that the Model 3 ever had problems in the first place, just like with the X.
Comparing the model 3 to other electric vehicles reminds me of when people were comparing the iPod to other MP3 players based upon tech specs. At this stage, the electric nature of the car just bolsters the design and UX of it. Comparing it to other EVs because they happen to share the same type of motors is stupid. They should be comparing the Model 3 to high end luxury combustion vehicles because from my vantage point you're getting that kind of driving experience, better even, for half the price. The only place where the electric nature of the car creeps into your life in a negative way is when you consider long trips. And even then, the impact is minimal because of the supercharger network. (You are going to stop regularly on long trips for breaks anyhow, so just charge the car.)
Beyond that, the only way the electric nature of the car impacts your life is beneficial -- no more trips to gas stations and less cost of ownership. At some point you stop even making the comparison because it's just a plain better ownership experience so you don't think about it anymore.
I ask because the Model S can’t compare with the S Class or 7 series on comfort and luxury, yet you’re saying the model 3 should be compared
There is no dashboard, no key, the whole car is controlled through the center console. The only buttons are entirely flush with the surfaces they are on. They don't even have door release handles on the inside the door pops open when you grab and depress the button flush on the handlebar to exit. Rip the steering wheel out and there is no longer a clear driver's seat just two symmetric front passengers. I find the design refreshing enough and the torque of the engine responsive enough (with no transmission pullback) to say it outweighs other potential creature comforts on a feature level. My last car was a BRZ and I don't miss it too much :)
All the things you described are very subjective. It's not "pure" it's barebones. It's not "distilled" it's optimized for cost savings in a way that would insult the average luxury car driver.
A mid-range luxury car these days often comes with a DCT or a very advanced non-DCT transmission that's capable of mind blowingly quick shifts and creamy smooth power delivery.
This is all coming from a guy who had a first month reservation for a Model 3 and went for a Volt instead after some hard thinking and a few... Tesla antics... I disagreed with, so it's not like I'm one of the people who thinks EVs "can't be enthusiast cars" like some people.
I feel like people are overstating what a change in drivetrains will do to car manufacturers. It's true this drivetrain adds requirements for space for batteries and infrastructure for charging, but car making will still be car making (ironically, as Tesla has shown with it's production issues).
My money is on Tesla becoming the next Porsche as far as volume and market. That's not a bad place to be, but it's not where the market has priced them at.
Tesla hasn't demonstrated enough self-driving progress (and imo, no one has yet) to justify the car's design to me, nor being a company with a 54 billion dollar market cap.
It's one thing if FSD was just on the horizon, but there are an incredible number of very hard problems to solve before we get there. Yet Tesla is designing a car that requires FSD for justification of it's interior and charging for FSD as a feature.
The Model 3 can't compare to high end luxury combustion vehicles.
Clearly getting the production line wrinkles ironed out has been a much bigger challenge than Musk expected but that is typical of almost every thing that Musk as done: Envision a way to make things an order of magnitude better. Work like a bugger (while blowing through a dozen deadlines) to make that happen. Eventually, come out the other side smelling like a genius -- because the original vision had merit and was not just a pipe dream. The model 3 fits this mold.
In terms of finance and cash flow, unlike previous near death experiences with Tesla and SpaceX, now Musk could quite easily sell of a chunk of equity in SpaceX to finance what's yet to be done in debugging the production line if the markets won't oblige. But likely the bigger problem right now is time rather than money before things come right. Most of the upfront production line expenses will have already been spent, now it's a learning curve to make it tick along as expected.
Musk plays the edge of these things. If it wasn't way too ambitious it doesn't seem like he'd do it.
On the one hand, despite the challenges, Tesla has built more Series 3s than Chevrolet has built Bolts. On the other hand that's about 15% as many per week as Tesla thought they could do. The reason this isn't a fatal disaster is that nobody else is yet willing to try to beat that. There is no real replacement for a Model 3 available.
Building hundreds of thousands of cars per year is not something that industry newcomers have managed to do for a very long time, nevermind electric aluminum cars. This is a different challenge than competing against high-end BMWs and Mercedes that also have relatively small production runs.
The advantage Tesla has is that they started the learning process early. The competition is still a couple years from profitably selling a direct alternative. But every month Tesla is late is a month of sales runway and revenue gone.
A lot of the value in buying a company like Tesla is the patent portfolio. In 2014 Musk announced that these would be "open source", but I can't actually seem to find any legalese with the details.
As for the rest, I imagine the residual value is brand, a lot of which is deeply entangled with Musk himself. As a buyer I'd be asking for a hefty discount because I would expect Musk wouldn't stick around to spruik the goods.
Also, would that endanger Musk's other projects? I seem to remember he's pretty leveraged in Tesla, but I assume financially each company is separate?
"Stop Media with Sound"
I personally have all videos blacklisted, and I white list a few sites.
I assume there are other formats where this comes up too. Podcast-like stuff seems pretty natural tho.
You quickly sell these borrowed stock on the market for $100.
1 month passes. The stock goes down.
You buy the same amount of stock, but now for $50.
You return the stock to the person you borrowed it from.
You have profited $50 per stock.
You can now get a nice cold pint and wait for all this to blow over.
You HAVE to buy the same amount of stock, but for $150.
You HAVE to return the stock to the person you borrowed it from.
You lost $50 per stock.
What does happen if the stock goes up is that your brokerage company will ask you to put up the delta. In other words, if it goes from $100 to $110 you'll be required to deposit the equivalent of $10, the delta, times the number of shares you shorted. If you shorted 1,000 shares you'll have to deposit $10,000 for every $10 of upwards movement in the stock price. If you have long (traditional stock buying) positions in your account your broker might actually sell those automatically to cover this delta.
The other important point is that this is a loan. Which means you will pay interest on the funds, in this hypothetical $100,000. The interest charged can vary. If, for the sake of an example, we assume 5% simple annual this means $5,000 per year or just over $400 per month.
I used to day trade (about 20 years ago) and would use shorting multiple times per day. I am not sure I would consider shorting for long term (> 1 day) positions. As many have said, the potential for loss is great.
Short selling is not for the faint of heart.
EDIT: This is not the whole truth; see the replies below. You can essentially buy insurance to limit that downside (via a call option), or put up money that you lose if the shorted stock rises above a certain price (via a margin). I am not a lawyer or a financial advisor. I'm just some internet person.
Nobody trusts you to be able to pay up for the "unlimited downside", so when you short stock, you are required to provide some collateral. For example USD or other stock held in your trading account. When the price of the stock you borrowed rises enough to match your collateral, you need to either provide more, or it gets used to buy the stock and repay the stock debt. You lose your entire collateral but don't get stuck with unlimited debt.
This limits the amount you can lose in total - but actually makes losing some amounts more likely. If you short a stock, but it goes up for a brief while before dropping - then you can still lose your investment at the peak even if you were correct in the long term.
The thing about short sales: the most the stock can go down is to zero, but there’s no limit to how high it can rise. So, you have limited upside with unlimited downside.
It’s also a leveraged position, since borrowing the stock is typically free and selling it generates cash. In the example above, you start with $0 and end up with $100 per share in cash and a corresponding $100 per share in debt. In theory, you can short an infinite amount of stock. In practice, you are limited by both margin requirements (debt to equity ratio), and the fact that the market would start moving lower to account for the sudden influx of stock for sale. However, even small moves in price can have a huge influence on the profit or loss of a short sale, since you can turn a small amount of cash into a large short position.
with long you buy, then sell.
with short you sell, then buy.
The argument for doing so is that humans err in favour of optimism -- ie, that prices will rise. But you can make money on the market moving either way.
Looking on it as a total outsider with limited knowledge, it seems like a fascinating niche in the financial world. But I imagine it is also even more stressful than betting on the price rise, because you're more often going to be outside the pack.
Time(t) : ---buy(S1)------------------sell(S2)----->
In short selling, the buy's and sells are reversed, so you are hoping the stock price drops.
Time(t) : ---sell(S1)-----------------buy(S2)------>
Notice that if the stock price drops S2 - S1 is positive. Conversely, if the price rises you lost money.
There are other technical details, but this is conceptually an easy and accurate enough way to think about it.
If the price has indeed gone down then you win. Problem is, the price may have gone up, and now you have to buy at a higher price, so you lose. The worst part of this is that the loses are unbounded, since the price rise could be arbitrarily large.
In practice it's not a problem, some you win, some you lose, and you are effectively betting on price market movements.
You can now deal with options. So when you promise to sell someone something in the future at price X, they have the option in the future of taking you up on that. If the price of X has gone down then obviously they will go and buy it directly, but if the price has gone up then they come to you and demand that you supply at the agreed price. In return for this option, they pay you when the deal is strike. Thus you are selling them the option of buying at a price.
Similarly you can sell them the option to sell you something at a price. These options are derivatives from the original concepts of buying and selling at given prices.
There's more, but I'll stop, not least because that's pretty much all I know.
Finance 101: You've just described a naked short, which is illegal in the US. You are required to cover the position.
So it seems that when you don't initially own any of the product, the only way to "sell short" is to promise to buy it later which is still selling something you don't have.
Unless it really is a case of persuading someone to "lend" it to you, and then selling that, so you are selling something you don't own, and someone else is trusting that you'll return it.
Is that right?
You can either run this strategy repeatedly, using 3-month options, or buy extremely long-term options and keep it open for as long as the options last.
Margin calls are the nightmare scenarios for short sellers, since they can force you to buy out at the worst possible time.
noun cru·ci·ble \ ˈkrü-sə-bəl \
2: A severe test
I cannot tell if it was titled this to add an air of mystery or trying to be too clever for its own good, but it is pretty shoddy either way.
Tesla should have stuck to high-end markets. It looks like their foray into mass production will end badly.
Making "mainstream" cars targeted at middle-class buyers is an entirely different thing. Sales price is a huge factor, and at that volume saving a dollar or two on any given component is something you spend time trying to do. Optimizing the manufacturing process is also critical. Chevy and Ford and Toyota know how to do all that. Tesla doesn't, yet.
Another concept looking for a problem is crypto; as the only problems crypto really solves are the ones faced when doing illegal transactions or hiding money.
That comment has absolutely no merit whatsoever.
1. No oil changes. 2. Fewer moving parts, fewer repairs, longer life. 3. Instant acceleration. 4. Zero emissions. 5. Ability to be fully powered by renewable energy.