Tesla burns cash ...and Wall Street analysts

Elon Musk’s usually chummy relations with Wall Street took a troubling turn during a highly unusual first-quarter earnings call

Charging stations for Tesla electric cars are seen near Estavayer-le-Lac, Switzerland April 27, 2018.  REUTERS/Denis Balibouse

Charging stations for Tesla electric cars are seen near Estavayer-le-Lac, Switzerland April 27, 2018. REUTERS/Denis Balibouse

 

Tesla’s earnings report started optimistically enough, with Elon Musk forecasting an end to its cash-burning days after blazing through another $1 billion last quarter.

But by the end of of the conference call, Mr Musk was berating analysts for asking “boring” questions, the shares had plunged and any shred of predictability was out the window.

Mr Musk (46) has built up a showman’s reputation as the founder and chief executive of Tesla, calling on true believers to help him overcome the “haters” who question his company’s ability to usher in an electric-vehicle age on an ambitious timetable.

His performance on Wednesday revealed his willingness to bite the hand that feeds, ridiculing representatives of Wall Street’s biggest banks who tried to pinpoint how he’d live up to his promises to build more Model 3 sedans and generate cash in the second half of the year.

Mr Musk cut off analysts’ queries about the company’s capital requirements and whether it was retaining Model 3 reservation holders, calling the questions “so dry” and “not cool”. The stock sank 4.5 per cent in late US trading. The skid continued in Europe, where Tesla’s German-listed shares were off 4.9 per cent at mid-morning Thursday.

“The boring questions can also be categorised as the tough ones,” said Dave Sullivan, an analyst at AutoPacific. “I hope the Tesla fans know how to swim, because without the answers to the tough questions, it looks like Musk is leading them straight into the water.”

The often-colourful Mr Musk unveiled what he portrayed as Tesla’s first mass-market car more than two years ago but has pushed back Model 3 manufacturing targets several times. Slow output has limited the amount of money coming in from customers taking delivery and tested Tesla’s balance sheet.

Prospective patrons have showed patience – there are still more than 450,000 reservation holders waiting, and customer deposits keep rising, approaching almost $1 billion as of March 31st.

When Joe Spak, an RBC Capital Markets analyst who rates Tesla the equivalent of a hold, asked Musk how many Model 3 reservation holders were actually taking the step to configure their car when invited to do so, a pause followed.

“We’re going to YouTube,” Mr Musk said, referring to the owner of a channel on the video-streaming service who had lobbied the CEO ahead of time for the chance to ask questions on behalf of retail investors.

“Sorry,” Mr Musk said, “these questions are so dry. They’re killing me.”

Robotic arms assemble Tesla’s Model S sedans at the company’s factory in Fremont, California.
Robotic arms assemble Tesla’s Model S sedans at the company’s factory in Fremont, California.

Tesla’s balance sheet also was a sore subject for the CEO. While Tesla expressed confidence about the second half of the year, negative free cash flow was more than $1 billion for the third time in the last four quarters. The result was also worse than analysts’ average estimate for cash burn of about $978 million.

Tesla had $2.67 billion in cash on hand at the end of the first quarter, down from the $3.37 billion at the end of last year. Toni Sacconaghi of Sanford C. Bernstein, who rates the company the equivalent of a hold, bore the brunt of Mr Musk’s sharpest words after asking about capital requirements.

“Excuse me. Next. Next,” Mr Musk said to the call operator. “Boring, bonehead questions are not cool. Next?”

Model 3 production probably will pause for about 10 days this quarter, an estimated duration that includes a shutdown last month to address bottlenecks. While Tesla’s battery module line was the main issue plaguing output for months, that’s been resolved, according to the company. Mr Musk now expects to be able to make 5,000 cars’ worth a week before installing an automation system from its German manufacturing unit Grohmann.

On the call, Mr Musk said Tesla is poised to surpass all rivals in manufacturing.

“A really great production system is primarily a software problem, and there’s no one in the auto industry that is remotely as good as Tesla at software,” he said. “Tesla is way better at software than any other car company.”

Elon Musk:Tesla is way better at software than any other car company
Elon Musk:Tesla is way better at software than any other car company

The most dumbfounding moments during Tesla’s earnings call

Elon Musk’s usually chummy relations with Wall Street just took a troubling turn. During a highly unusual earnings call, Tesla’s chief executive cut off analysts and got defensive about probing questions pertaining to the electric-car maker’s finances.

He said he won’t need to go back to equity or debt markets this year to seek additional funds for Tesla, but crossing Wall Street may be a bad idea. The billionaire wooed investors into buying $1.8 billion worth of bonds in August, which fell within a week. Five months earlier, Tesla sold about $1.25 billion worth of stock and convertible debt.

Here were some of the most head-scratching moments of the call:

Federal case

Mr Musk aimed his sharpest words at Toni Sacconaghi of Sanford C. Bernstein, who rates Tesla the equivalent of a hold. After the analyst asked a question about whether the company could reach its 25 per cent gross margin target on the Model 3, chief financial officer Deepak Ahuja said recently imposed tariffs, more expensive commodities and higher labour costs factored into the company’s guidance.

“Yeah, but we’re talking about a 3 per cent to 5 per cent difference, and that’s something that we’ll solve like within three months to six months later,” Mr Musk said. “So don’t make a federal case out of it.”

‘Bonehead questions’

Mr Sacconaghi pressed ahead with another query about Tesla lowering its 2018 capital expenditure projection to $3 billion, from $3.4 billion. Mr Ahuja said the carmaker would spend less by simplifying its approach to automation and curtailing infrastructure outlays.

“And so, where specifically, will you be in terms of capital requirements?” Mr Sacconaghi said.

“Excuse me. Next. Next,” Mr Musk said to the call operator.

“Boring, bonehead questions are not cool. Next?”

‘So dry’

Mr Musk wasn’t done putting down analysts. Joe Spak of RBC Capital Markets followed with an inquiry about how many Model 3 reservation holders were actually taking the step to configure their car when invited to do so.

After a pause, Mr Musk said “We’re going to YouTube,” referring to the owner of a channel on the video-streaming service who lobbied the CEO ahead of time for the chance to ask questions on behalf of retail investors.

“Sorry,” Mr Musk said, “these questions are so dry. They’re killing me.”

‘Do not buy’

Near the end of the call, Musk was blunt with Ben Kallo, a Robert W. Baird & Cmpany. analyst who prefaced a question by saying he understood the CEO’s frustration for “how myopic we are right now”.

Mr Kallo, who rates Tesla a buy, encouraged Mr Musk to give more updates about progress making Model 3 sedans, in order to help the company’s stock.

“I think that if people are concerned about volatility, they should definitely not buy our stock,” Mr Musk replied. “I’m not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go.”

‘Don’t be lame’

One set of questions from the YouTube host, Gali Russell, was about Tesla’s supercharger network and whether it should be available to other automakers – as Mr Musk has suggested – or kept as a strategic moat.

“First of all, I think moats are lame,” Mr Musk said. “They’re like nice in a sort of quaint, vestigial way. But if your only defence against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness.”

– Bloomberg