Tesla Bonds Are in Free Fall
bloomberg.com
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Being a startup is like being a gladiator. Every day is another war. Every day other startups die. Every day of survival doesn't fill you with relief; you just think of tomorrow's doom.
The general public only sees the sausages that come out of the factory. They only see the glory of massively successful companies like Dropbox. They would be horrified if they saw inside. The blood dripping through the grated floor. The graveyard of bones ground up and spit out as meal for the next "lucky" founder.
This week the public has gotten a taste of how Tesla's sausage is made. Truth is; every day for Tesla has been like this. The truth is, every day in Tesla's life has been the closest it has ever come to death.
Those in HN who've built a company know this. But they also know _why_ they suffer this pain.
A mere two months ago SpaceX launched humanity's dreams into the outer reaches. Meanwhile Tesla is single-handedly altering the course of ground transportation.
Last weekend we took a trip to San Diego in a Tesla. An all electric trip, charged up using the solar panels at our home, with most of the travel time driven by autopilot. The future drove us there and back again. That's why Tesla does what it does.
I don't see the point in discussing Tesla's financials and their "impending" doom. Instead, I think the only appropriate thing to say is...
Nos morituri te salutamus
But it's the auto-driving that seems to be sub-par thus far. Though the data isn't public (mostly), it seems like the auto-driving software is worse than the average driver. Again, seems.
That said, the failure modes are really different.
And technically someone Coyle design a smoke test for self driving cars that would put in some confidence into their abilities.
We do that for human drivers, it is called a driving exam. Could be extended as much as we want it.
I agree that the cars need certs though, each and every one.
The number of deaths in envelope-pushing, new tech, accidents, compared to regular traffic deaths, is minuscule.
It's not about the number in this situation, it's about the stats. Uber's cars kill at a higher rate than the average driver. Granted, that stat is based on 1 data point, so it's not really a stat at all. Still, like, a ton more testing is obviously needed before these should be allowed anywhere near a school.
Like, you wanna test a jet-pack? Be my guest. I'll grab a fire extinguisher when/if it fails.
You wanna test a jet-pack near with dog in your arms? Dude, no way.
possibly Tesla) kills a person
When Musk first announced the proposed Model 3 production schedule, his two top manufacturing executives quit. They knew that the shortcuts Musk wanted to take, like skipping debugging of the assembly automation at the supplier's factory, wouldn't work. They were right.
Too many people believe in the vision of Elon to let this fall apart because of short term production issues.
If anything, this could be a good thing for Tesla as it might attract other owner/operator expertise to the firm.
Tesla became too big to fail and Musk became too hype to fail.
They need to raise some serious money in a new equity offering, guess we'll see if the market will tolerate that or not.
At $260 / share, I don't think so. Tesla's stock is also in freefall.
I disagree. They have a $230 million bond payment due this year but that seems survivable to me.
The $920 million payment due March2019 is the difficult one.
Even if the company were to collapse, I wouldn't expect it to collapse until 2019 at the earliest.
Part of the function of financial cash markets (options are another matter) is to discount future profits into present prices. An expectation of a 2019 collapse is nearly as good, in terms of present asset price discovery information, as an expectation of a 2018 collapse.
These solvency expectations feed forward to the present, driving prices lower, which makes raising money to avert the expected collapse anywhere from expensive to impossible. It's a . . . "fun" cycle to be caught in.
They can raise $2 billion tomorrow morning in an equity dilution. They're not going to collapse in 2019 either.
The $230 million is trivial. They have ~$2.8-$3 billion in cash as of end of Q1.
The issue isn't the next year or two. They still have a lot of market cap available to abuse if they absolutely have to. You can chop their market cap in half right now and they could still raise $2 billion just the same via equity.
The big question is whether the Model 3 gets up to a scale in the next year that pushes their burn rate down toward something a lot more manageable. If not, then investors will probably pummel their valuation and their debt costs will continue to climb, forcing very difficult spending decisions to substantially cut their quarterly losses.
And they're losing $408 million per quarter, on the average. (a loss of 1,632,086 thousands of dollars in 2017, according to their 10K)
At the current rate, Tesla is going to be forced to raise more capital within the next year.
Tesla definitely can survive till 2019 by my math. They can probably survive longer than that if they cut costs. But once Tesla cuts costs, they stop R&D and other "luxury" projects. Cutting costs implies cutting growth.
Tesla is still very much in the growth stage for some reason. They can't afford to cut costs yet.
Steady growth could work by that's make the company a boring "luxury car maker"... at the time scales investors look into.
Tesla cannot make enough of them because Tesla cannot make enough of them.
Everyone knows Tesla can sell those cars instantly if their production lines are up to snuff. But the production targets are laughably behind. 5000 cars/week by Dec2017 ?? Yeah right. Its March2018 and they haven't even hit 5000/week yet.
I wouldn't say they are laughably behind. Projects do get delayed. My own projects got delayed by multiple months. The California high speed rail is 3 years delayed ! Its better to do it right than to just hurry things.
Do you have $230 million dollars payment due in half-a-year, and $920 million due in a few months after that?
> Its better to do it right than to just hurry things.
Sure it is. But the CEO has to keep the bills paid, and the bill is about to come due. I think its reasonable for people to feel worried right now.
Elon has managed to scrounge up money out of nowhere before. The Model 3 reservation system raised $300 million nearly instantly for instance. So these aren't unfathomable numbers at all.
But its a risk.
Tesla bet the farm on revolutionizing auto manufacturing while seemingly ignoring much of what other manufacturers have learned over the years.[1] Long-term, elements of that bet could pay pay off. But right now? They're still struggling to scale up Model 3 production. And that's for a car that was literally designed to be less complex to manufacturer, with fewer, simpler parts relative to the Model S and X. It doesn't matter that their manufacturing approach might be more efficient in the future when everything is working perfectly if they can't meet their bills this year.
No other manufacturer has these kinds of prolonged production problems. They meet significantly higher production targets and with fewer quality control issues. If Tesla doesn't show significant progress this year (both on production targets and lowering their burn rate), they're going to be in serious trouble. Most likely, we'll end up seeing Tesla have to hire contract manufacturers like Magna Steyr to build complete cars.
Personally, I'd be fine with that. It'd give Tesla its best chance to entrench itself in the EV market before the traditional automakers step get involved. They, for one, won't have similar problems. I genuinely want Tesla to succeed, but it's become abundantly clear that they don't know how to find a way out of "production hell."
0. https://www.reuters.com/article/us-tesla-results/tesla-puts-...
1. https://www.forbes.com/sites/joannmuller/2016/08/04/tesla-mo...
Infiniti sold something like 60,000 Q50s globally in 2017 by comparison, for a sedan line they've been selling for decades (the G37 & G35 prior).
Nissan only sold 27,000 Leafs in the US + Europe in 2017, after seven years of availability.
You mean, because they have priced them below the price that would clear their ability to produce, and have either inadequate resources or inadequate competence to scale production to meet the quantity demanded at the current price. So, they are failing at either production or pricing or both, and losing money because of it.
[1] https://ycharts.com/companies/TSLA/gross_profit_margin
When things are good, hype is great. Not so much when things start to implode.
Moody's downgraded their debt and it has indeed been plummeting, that's not a creation of the media at all. It's actually the opposite of your claim. If this were any other auto company other than Tesla the stock would be nearly worthless, the media has hyped this thing to the stratosphere.
They don't have the bugs worked out yet, so production is behind schedule.
Ultimately it's a big engineering problem.
I've learned not to bet against Musk solving difficult engineering problems.
Maybe Warren Buffet or another investor with the long view would be a solution?
Most people don't know throw billions of dollars around on infirm beliefs, they do it on an expectation of return. If Tesla is getting to the point where the finances no longer support the dream you shouldn't expect billionaires to behave much differently from the markets.
>If anything, this could be a good thing for Tesla as it might attract other owner/operator expertise to the firm.
Oh please, surely techies have seen this 'this is good for bitcoin' enough that they're not going to fall for the same dumb scam with Tesla.
https://www.cnbc.com/video/2017/12/12/social-capitals-chamat...
Billionaires don't get to be billionaires by throwing money at things with no reasonable expectation of return (well, except Trump, but that's a different story). If Tesla can't figure out how to make money, they're not going to come running. If they were, they'd already be snapping up Telsa's underpriced bonds and stock.
> If anything, this could be a good thing for Tesla
"This is actually good for Bitc^H^H^H^HTesla"
Would another owner/operator really be successful? Musk is probably the only person who could have received so much investment and goodwill over so many years without becoming profitable. And Tesla is going to need to continue to raise money for a while.
If a boring guy from an established car company had been in charge, investors would have run out of patience years ago.
Tesla isn't failing because of lack of belief in the vision (Which in absolutely no way belongs to Elon btw). Tesla is failing because they took a huge bet on being able to set up a car manufacturer faster than the established market could adopt the technology.
Tesla still has a great brand to it, but it seems unlikely that they will be able to compete on price, so they might end up only having a high-end electric niche which cant justify their current inflated valuation.
If Lockheed really believes in their device, they ought to buy Tesla.
. . . As a reality check, Tesla is worth twice as much as Ford* yet Ford made 6 million cars last year at a $7.6 billion profit while Tesla made 100,000 cars at a $2 billion loss.
Further, Ford has $12 billion in cash held for “a rainy day” while Tesla will likely run out of money in the next 3 months.
Other advertising companies made far more profit than Google, had more cash in the bank than Google, yet had lower valuations than Google.
On that evidence, many "experts" and "analysts" said Google was grossly overvalued.
Today it's easy to see that their analysis was dead wrong. If you can figure out why the conventional wisdom then was wrong, you'll understand why Tesla stock has value today.
Your argument fails at that. Considering Google strictly an "advertising" company is a narrow view, even in 2004.
Apparently they couldn't imagine the future, so they measured Google against its contemporaries.
Comparing Tesla to Ford is a similar failure of the imagination.
I've never understood why Tesla raised debt. They should have been issuing equity and nothing else, capitalizing on the insane valuation its had for the past 3-4 years. Debt would have been fine if they executed well, but they haven't.
[1] https://www.cnbc.com/2017/12/14/jim-chanos-we-think-tesla-is...
Jim has been trying to make a profit short selling TSLA forever. I can’t take anything he says seriously, crying wolf and all that (although Tesla is going to have liquidity issues at the end of the year if they can’t get their debt refinanced).
TLDR Capital intensive business facing challenges in rising interest rate environment.
There are various services (e.g. StarMine) that seek to rate actual (e.g. professional) analyst firms.
But generally speaking, nobody's abnormally right over the long term.
Has Tesla's stock price defied gravity up until this point? Sure. But eventually it's going to need some real reason why it's the most valuable car company in America. And, as it's bond prices are showing, there are some serious existential risks to its business.
A short still makes way much more sense here.
i think that's about as accountable as it can get. at least this guy puts his money where his mouth is.
Liquidation of specialized, heavy hardware is pennies if not fractions thereof on the dollar. I have my standard-issue Swiss bias against debt, but it seems--with the benefit of hindsight--that issuing debt was a bad call by Tesla.
n.b. I own a very small amount of Tesla stock, and I have no particular opinion of Chanos.
However, the production timeline issues combined with the poor quality of Model 3 cars which have already been released is a big concern of mine, to the point where my confidence is lowered in the company. I really want to believe he'll find a way out of this but it's not hard to see why investors are worried.
Yes, Tesla was a bit ahead of everyone else to market, but how are they going to compete when they're not the only one in the "luxury electric car" space?
Sure, Panasonic manufactures the 2170 cells, but they aren’t in the same game as Tesla.
where ever somebody wants them.
>>Sure, Panasonic manufactures the 2170 cells, but they aren’t in the same game as Tesla.
While true Tesla is a value-add on those cells, but like 99% a value add for themselves. The quick question is if one of them died would the other survive...
I think if not for tesla, other car companies would not be scrambling to make better Evs.
Tesla was founded in 2003 to design hybrids. By 2008 the company had been taken-over by Mr Musk and changed focus to all-electic drivetrains and released the Roadster.
Nissan launched the Leaf in 2010 as the first mass-produced all-electric car.
EVs were coming regardless of Tesla. I'm sure they have helped promote the option and accelerated adoption within their target demographic but to 90%+ of the market they're irrelevant.
I agree with ironjunkie that Tesla is too hype to fail; Tesla has had production issues since the start of the Model S... 6 years is no longer 'short term'
I think Tesla going to Google or SoftBank or another group and asking for an infusion of money (and maybe a Waymo collaboration if it’s Google) would be much more likely.
If Tesla can't make it SpaceX will not come to the rescue.
This market and their own situation combined, can easily be one of those cases where you wake up in May or June with 1/2 the market cap you had in January or February.
The market however, is reacting to Moody's credit rating. Moody's downgraded Tesla to B3 and Caa1 earlier this week, which is well into junk-bond status.
The TL;DR about it is that Telsa's Model 3 production isn't ramping up fast enough. Tesla's current debt deadlines are:
* $230 million due in November 2018
* $920 million due in March 2019
Tesla is running out of time, and the Model 3 isn't being made fast enough. There's plenty of demand. Tesla is most likely going to be forced to borrow money to pay off its last debts.
Rolling debt, totally unheard of.
The question is what prices does Tesla get on its new debt? And is it sustainable?
But since Tesla is manufacturing Model S, Model X, Model 3, Powerpack and Powerwall, it’s a safe bet that $230M will be covered with expected sales even if Model 3 production stalls at this week’s peak.
$920M next year means Tesla have to reach 50k Model 3 a month with no other income.
If they start rolling out Solar Roof before then, and sell any Model S or X, or raise the rate of big battery installations, they will make that payment too.
Tesla doesn’t only sell cars.
https://si.wsj.net/public/resources/images/OG-AX813_TESLA1_F...
Tesla lost $1.6 Billion dollars in 2017. Tesla is going to lose money in 2018 AND it has bills due.
Moody’s rating is also based on naive fresh faced belief in aspirational targets as accurate forecasts.
We will see if Tesla meets their revised targets. My interest in the company is as a reservation holder, and all I really care about is that they stay afloat. I am not an investor looking for incredible returns on overvalued stock.
By the way, the stock is much lower. It's down over 15% since Monday. You can blame general stock market volatility for some of that, but even so it's a much larger drop than the overall market experienced.
If you have to pretend that a Tesla shorter is a journalist you should consider that maybe your world view has some problems.
Credit rating agencies have defined rules and many institutions have policies on what mix of bonds they have. Investors do over-react to short term news.
Debt markets are tightening up and junk companies will not survive. They need to raise north a billion this year. It’s reasonable to be a bear, unfortunately.
If you like Tesla cars, the best investment in them is to see which automaker is best positioned to pick up what’s left.
TSLA is down 28% this month. How much lower would it have to go before you were convinced that the market is "actually" worried about insolvency?
And frankly, even if it weren't down, your position would still make no sense. People trade bonds on the expectation of whether or not they'll be paid back. Are you trying to claim stock prices represent what the market really thinks, but bond prices are just posturing?
The bond price/yield chart appears to be going parabolic in the past few days.
They could, but with TSLA down almost 30% in a month and shareholders already grumbling, they are fast approaching the limits of what they can tap in the equity market.
> Heck, maybe they could start a GoFundMe.
Please be serious. Tesla is losing $400 million every month and has over a $1 billion in debt payments due over the next year. We’re talking about big person money here.
See https://www.sec.gov/Archives/edgar/data/1318605/000156459018...
Its because if you have $950 in bonds, and interest rates rise, then your $950 is worth less (maybe $930 now). Similarly, if interest rates fall, then your $950 is worth closer to $1000.