On earnings reporting day, companies issue an earnings… you guessed it: report! Later that day, the top-brass of a company hosts an earnings call. The format of the call is usually a succession of small statements from the CEO, followed by the CFO, and any other officer that has something interesting (or otherwise) to say. The next stage is usually a Q&A session. Just to be clear, Q&A stand for Questions and Answers. Answers being the key word.
The people attending the earnings call are investors, reporters, and research analysts who put their well thought highly relevant questions to the company’s executives, and would expect a truthful answer.
Apparently, nobody informed Mr. Elon Musk of this small fact. During last week’s call he lashed out at analysts with comments such as: “Boring, bonehead questions are not cool. Next!” or “…these questions are so dry, they are killing me”, followed by a baffling: “I am not here to convince you to buy our stock”.
Now, we all know that Elon Musk is a maverick thinker, pioneer, and disrupter; it is also well known that people who buy Tesla (NASDAQ:TSLA) stock are basically buying an Elon-Musk-call. But at some point the guy needs to realize he has to respond in a mature and professional way to questions regarding his business model.
We are not talking about a CEO whose company is printing money and giving the shareholders a healthy profit – if that were the case, such a cocky attitude could be at least understood if not condoned. But no, we are talking about a company that has failed to turn a profit since inception. It has tapped the capital markets several times, most recently in August 2017, when it launched its 2025 5.3% $1.8 billion bond. That bond is currently trading at 7.8%, in other words, investors have already lost about 12% of their capital.
So, how did the market take it? Well, the stock was trading a few bucks in the green on after-hours, but as soon as Mr. Musk had his outburst the stock dropped 6% (a drop of nearly $2 billion on market capitalization).
Tesla announced that capex for 2018 would be at around $3 billion, but with a cash burning rate of a billion dollars a quarter, and buyers no nearer to seeing a Model 3 in exchange for the deposits they so excitedly paid over a year ago, one could argue that the capex question in the analyst call was totally in the money. The answer unfortunately, was not.
As an investor I would be extremely worried about those comments, and most importantly the kind of a return my investment is getting me. Fortunately for Tesla, I am not a shareholder. Tesla’s shareholders seem to be happy with the idea of throwing billions of dollars into a dark pit, in the hope, that one day they will revolutionize the world. But like I said in my post: The Emperor’s New Clothes sooner or later economics will prevail, and investors are going to wake up to the fact that the Emperor is not wearing anything at all.
The cold hard facts are Tesla is:
- losing money every quarter
- still burning a mountain of cash every quarter
- still not mass producing its mass-production car model
At this rate, sooner rather than later, they will have to raise more capital, and with their bond ratings cut, and outstanding yields at over 7.5%, the only viable option will be to raise more stock. I would hate to be Elon Musk when that day comes.