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It had been a rough year for Tesla investors. And, last week, things went from bad to worse.
Tesla Inc. held a memorable earnings call Thursday, as CEO Elon Musk mocked an analyst’s question as “not cool” and criticized the media for sensationalizing autonomous-vehicle crashes.
It’s tempting to think that this is just another unconventional event from a feisty CEO at a dynamic technology company. However, it’s important to keep in mind that Tesla shares are down about 25% from their all-time high of $383 set in June 2017. That’s after a host of concerns that include a fatal crash for one of its Model X SUVs on Autopilot, a recall of more than 120,000 Model S sedans and mounting concerns about its cash position, among other things.
With momentum stocks like Tesla, the narrative drives the stock. And until a year ago, Musk & Co. were able to spackle over some of the holes with big talks about their hopes and dreams.
But, lately, as the cold reality of cash burn, lawsuits and production bottlenecks has been brought to bear, the narrative has changed. And particularly over the past few months, Tesla has had as much trouble manufacturing favorable news items as it has producing its new Model 3 vehicle.
I’m not saying Tesla can’t turn this around. Nor am I saying that if the drumbeat of unfortunate headlines continue, that Tesla will go bankrupt, as former General Motors exec Bob Lutz recently predicted on CNBC.
However, it is worth considering what happens when Tesla loses the benefit of the doubt — and loses a serious chunk of market value as a result.
Here are the seven big worries for Tesla investors:
A history of misses
The only thing really shocking about how inconsistent Tesla is about hitting its production targets is that each quarter, analysts look at the number as a firm figure instead of just what Elon’s best guess is this time around. In April, investors were greeted by a leaked memo that effectively said the company will put the pedal to the floor and start producing 24/7 to meet goals … but what happens when Tesla missed even then? And while profits never seem to be a concern, does anyone on God’s green Earth simply screaming “all hands on deck for overtime!” is the most profitable and error-free way to run a manufacturer of 21st-century vehicles? Though the urgency is overdue, it’s clear there are big risks regarding Tesla’s likelihood of hitting future targets.
Analysts are losing their patience
Some have scoffed at the reaction to Musk’s behavior in the earnings call as simply sour grapes from investment bankers who aren’t used to dealing with dynamic leaders instead of the typical stuffed shirts. But you have to consider that these analysts are motivated by only one thing: getting to the bottom of a company’s share price. Theoretically, the CEO of a publicly traded company should care about share price too, but after tweets making light of last week’s double-digit decline, it’s hard to have confidence that Musk will do anything to protect shareholder value. The price cuts from J.P. Morgan, RBC Capital and others reflect this reality, not something as petty as hurt feelings among Wall Street insiders.
Cash crunch
Last quarter, Tesla lost an adjusted $568 million, though, as the Wall Street Journal pointed out, the actual cash burn figure on the quarter was conspicuously missing and likely much higher than that. And while Musk claims that his car company will be profitable in the second half of the year, how long will that last, and how much capital will be needed to continue ramping production? Though Musk dismisses the need for cash, experts at Moody’s, Bernstein and Goldman Sachs have stated a capital increase is needed in the coming months. Anyone who thinks Tesla can just focus on making cars in its current financial structure simply isn’t doing the math.
Competition heats up
While Tesla has struggled mightily to meet production targets and fulfill a backlog of demand, other auto manufacturers seem to be having no trouble with their own plug-in models. Consider that overall electric vehicle sales were up 25% in 2017 over 2016, and while the flagship Model S remained the best seller in America at 27,000 units, the Chevy Bolt tallied 23,000 sales to come in close behind. And anyone who has followed the EV space for a few years knows that Nissan’s Leaf is also very popular, and was held back in 2017 only as the company bled down supplies of its older model to set the stage for a cheaper, longer-range model that has a lot of potential to continue building the brand. If you think Tesla has a stranglehold on the market, you’re just not paying attention.
Challenges to battery supplies
Systemic challenges continue to put a damper on electric vehicle production, including the not insubstantial challenge of a massive demand spike for metals like cobalt and lithium that are used in next-gen batteries. And recently, Moody’s called out chronically low investment across the mining industry as a big red flag for EV producers and others dependent on lithium batteries, both because of a lack of dedicated mines, but also a lack of production in base metals like copper that often strike small deposits of ores as byproducts of their main mining operation. Tesla itself identified the challenges caused by a battery bottleneck when it announced its ambitious Gigafactory project, but what good is a facility to make those batteries if there’s not enough raw material to go around?
Truck troubles
Startup Nikola Motor Co. recently filed a $2 billion lawsuit against Tesla, alleging infringement on the design of its new big rig that was unveiled in November. Even if the lawsuit doesn’t have merit, there’s the chance of a costly and protracted fight ahead of Tesla and Musk — and if recent events are any indication, it’s highly unlikely that Musk will cave in and just settle for expediency’s sake if his ego is threatened. Wall Street has long been eager for Tesla to show it’s serious about building out its business in full, and the reveal of a long-haul semi was a small part of the reason that Tesla stock firmed up late last year through February. With a cloud of uncertainty here around the truck line, it’s business as usual, which right now clearly is a risk.
Wrong definition of leadership
While Wall Street tends to go ga-ga over dynamic plans for moon shots and “disruption,” the reality is that the best CEOs often are simply the ones who get things done. But the data geeks at Freakonomics actually determined that the best execs — at least, as measured by stock price of the publicly traded companies they run — is simply to be an industry insider who knows how to execute. That’s not to say big ideas don’t matter, of course, since those ideas are in truth the only reason Tesla exists. But as my MarketWatch colleague Tim Mullaney recently wrote, “Musk’s vision and technical genius aren’t in most of us, yet he lacks something lesser executives generally have — the ability to shut his mouth and keep promises.” There is a lot of value (particularly shareholder value) in a leader who can do these things, instead of just tweeting about space travel or Hyperloops.