That calculus worked in the past. If it doesn’t work next time, it’s over for Tesla.
This is a cleaned-up transcript of my podcast on Sunday. You can listen to the podcast on YouTube.
The senior unsecured bonds that Tesla issued in August 2017 closed on Friday at a record low of 81.6 cents on the dollar. That’s a decline of over 18% from the price at which they were issued 21 months ago. Bond prices reflect what the market thinks the probability is that Tesla will default on those bonds, and what bondholders will get if it defaults.
When the price of a bond falls, the yield rises. On Friday, the yield hit 9.3%. In other words, investors demanded to be paid 9.3% in interest to compensate them for taking the risk of owning this bond.
That yield of 9.3% compares to the risk-free 10-year Treasury yield of about 2.3%. The difference between them is 7 percentage points. That spread is a sign that the bond market is getting nervous about Tesla going bankrupt.
Tesla shares closed on Friday at $190.63, down 50% from their 52-week high last December. Shares first hit $190 on the way up in September 2013. That was five-and-a-half years ago.
When Tesla raised $2.4 billion in cash from investors in early May via a convertible-bond offering and a stock offering, those hapless investors have lost 12% on the bonds already, and they have lost 25% on the shares, all in about three weeks.
So what does this mean for Tesla, the automaker?
Before we go on this journey, let me just say what I have said many times. I give Tesla’s CEO Elon Musk a huge amount of credit for having made electric cars something that people want to own. No one in the world has ever been able to do this before him.
Usable electric vehicles have been around since the 1880s, competing with steam cars and horse-drawn carriages. The technology of the electric motor has always been superior to anything else because of the flat torque curve that is ideal for transportation uses, and because electric motors are small and light-weight and simple. And they’re cheap to make, compared to an internal combustion engine. And they can run for many years without much maintenance.
The battery has always been the problem. They’re too heavy for the amount of charge they hold, they take too long to charge up, and they’re too expensive. But battery technology has advanced in leaps and bounds, and continues to do so, and it’s much less of a problem today than it was even a few years ago.
So Musk came along, supported by government subsidies for EVs. He bedazzled investors and raised many billions of dollars from them — $2.4 billion most recently in early May – and he has gotten these cars on the front page of every mainstream website, newspaper, and magazine. And the internet has become a cauldron of Tesla hype.
This investor support has made a lot of things possible. Teslas are now taking market share from BMW and Mercedes. And seeing this, all automakers have jumped into the fray. They’re now all selling EVs or will come out with EVs soon, from GM to Porsche.
This was Musk’s genius. He created an entire industry. That’s an awesome accomplishment.
His genius was having a vision and, by hook or crook, creating hype in the market and bedazzle investors – particularly big institutional investors that can invest billions of dollars and would likely remain loyal investors for years. This genius caused investors to pour many billions into Tesla, that Tesla then burned in its operations.
But Tesla still doesn’t know how to manufacture cars in a profitable self-sustaining manner. The company is a chaotic cash-burn machine, and that $2.4 billion in cash it extracted from investors in early May will only fuel this cash-burn machine for another 10 months, according to Musk himself.
Ten months from now, the company will face another liquidity crunch, and it will have to return to the market to extract a couple more billions of dollars, by issuing bonds or shares or both in order to fuel its cash-burn machine. And that fuel might not last long either.
The bond market is already nervous about the chance of Tesla defaulting and filing for bankruptcy, and 10 months from now, it might be even more nervous about it. If Tesla had to sell similar senior unsecured bonds today, it would have to pay over 9% in interest, instead of 5.3% three weeks ago; 9.3% is a huge amount of interest to pay for a company that is already burning cash hand-over-fist.
But if the bond market gets even more nervous about a default, Tesla might have to pay 11% or 15% or more in interest 10 months from now, to find investors willing to take the risk.
It would be ruinous for a cash-burn machine. And everyone would know it. And that knowledge would preempt any chance of pulling off that kind of bond offering.
Tesla’s situation gets even more complicated. The only reason why investors still handed Tesla $2.4 billion in early May – despite all the facts known about its cash-burn mechanics – is its stock price.
It was around $250 a share at the time of the offering in early May. While that was down 35% from the 52-week high, it was still a huge share price that induced investors to think that Tesla could sell more shares anytime to raise more money if it runs out of money. This was seen as a guarantee, of sorts.
Bondholders have counted on that guarantee. It was the most important consideration in the past: Their calculus was that as long as the share price is high, Tesla could avoid a default because it could sell more shares to get more cash to service its debts. But this sort of guarantee is contingent on a high share price.
Musk knows, come hell or high water, he has to inflate the share price so that Tesla can sell more shares and raise cash, and that bondholders see this, and are willing to lend Tesla more while counting on the guarantee provided by the high share price.
That calculus worked in the past. But if it doesn’t work next time, it’s over for Tesla.
In other words, if Musk’s hell-or-high-water strategy of inflating the stock price fails, and shares continue to fall, Tesla would be cut off from the bond market 10 months from now.
It might still be able to sell shares, but if the cash-crunch is obvious, and the cash-burn machine runs red hot, the stock market might not be excited about Tesla’s shares, and the price might fall further, and raising more cash by selling shares becomes more dilutive and punitive to existing shareholders.
Now, getting diluted is better than getting wiped out, or getting mostly wiped out, as would be the fate for Tesla’s shareholders if Tesla were to default on its bonds and file for bankruptcy. So if the price drops far enough, there might be enough buyers out there willing to hand Tesla another $2 billion, while praying for a miracle.
Assume Musk can raise another $2 billion in cash 10 months from now at a much lower share price and keep Tesla afloat for another 10 months. And then what?
Since mid-December, Tesla’s shares have plunged 50%. And Tesla still has a market cap of $34 billion. That’s still a gigantically inflated value, for a tiny automaker like Tesla, with a market share of less than 1% in the US, and near-zero market share in the largest market in the world, in China. The only thing big about Tesla are its losses and its cash burn.
So if investors are starting to look at Tesla’s reality, and are less bedazzled by Musk and Wall Street hype organs, then they will demand larger and larger price cuts to the shares before they’re willing to buy and take those risks.
And this could be fatal for Tesla. As long as it remains a cash-burn machine, Tesla’s survival is uniquely dependent on its high share price. When the share price drops below a certain level, Tesla will be cut off from the bond market; and if it drops further it will be cut off from raising more cash in the stock market. And it will run out of cash.
Other companies can brush off a low stock price. But a low stock price can push Tesla into default and bankruptcy.
So, come hell or high water, Tesla must do what is anathema to Musk: Figure out how to come up with a self-sustaining business model, make consistent profits, and be cash-flow positive. That would allow it to survive.
But wait… Once Tesla makes a profit, investors will look at the PE ratio of a tiny auto maker with a market share of less than 1%, in an industry that is terribly mature, and is now declining, and where all automakers make EVs.
Once this reality sets in, Tesla’s share price – with the halo worn off – will shrink until its PE ratio is similar to the PE ratio of other automakers. And that’s the optimistic scenario.
The realistic scenario is that Tesla will never get to the point where it is a consistently cash-flow positive self-sustaining company. And instead, the scenario kicks in where Tesla just runs out of money, like so many automakers before it.
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At these rate Tesla will be $10 stock, like Ford.
Per Jeff Snider today (Tuesday), economy on “verge of big trouble.” Get out while you can.
Uh oh. How bad is it, really? The plunge protection team head just quit and took his deputy with him. I see commentator after commentator alarmed at the rate plunge and what it implies.
Is the Fed digging in its heels? I can’t help but remember 1929 when the banksters finally went to the Fed and told the Fed it has to bail out the market. The Fed drew the line, after a decade of accommodation, and refused.
Keep this in mind. And if you look at it objectively, there is no way the Fed could bail out the market–it is mathematically impossible.
Time for regime change, kittens!
Jeff Snider says the Fed is now powerless and Shilling says the recession is here.
Snider says the Fed is just about to cut, but I wonder. Perhaps they think there would be no point. It wouldn’t juice the market–market would see it as sign of panic, which it would be. So what’s the point?
Potters resignation is typical ZH agitprop. On Snider what’s the economy got to do with it? Or Fed minutiae about manipulation of bank payments? In a globally interdependent system bailing out the markets is bailing out foreign investors, and if you bail out US banks you are bailing out DB as well. Without central bank cooperation the selloff could be explosive, but the supreme irony is that populist nationalist politics will get thrown under the bus.
Regime change is going to fix it ?
Well at least Ford gives about a 1.5% dividend
Ford is profitable and pays a dividend.
More like Enron on the way down.
Funny, really funny.
Watch how quickly the competitors will shutter their EV programmes when Tesla folds up it’s tent (literally).
The ONLY reason they have EVs launching is because Tesla made (I emphasize MADE) this a sexy play.
The reality is most people do NOT want an EV.
The reality is there is no profit in EVs.
The reality is that once Tesla begins to resemble a burned out crack whore the sex appeal of the EV will vapourize.
And no doubt we’ll get Who Killed the Electric Car 2.0.
Musk is a joke. Even with all these subsidies he STILL can’t make money.
Can’t wait to see this company go up in flames. Then our tax dollars can be redirected to the military or some other worthwhile cause.
Have you ridden or drove a Tesla or other higher end EV (Nissan Leaf doesn’t count.)
That seems to be a bit back to front. To answer the question honestly I have never been in an EV and don’t want to at the moment. However, I can see the attraction of an EV as a city runaround where you come home and charge at night or while you are at work if there is a charger around. What seems utterly moronic is to have a high end expensive EV that is totally impractical as your main mode of transport as any lengthy trip is rendered infuriating. So on that objective measure the Nissan Leaf and its equivalents are the only ones that count.
And funny enough Ford is actually making profit.
Something I didn’t know until reading it today in the Globe and mail about the proposed Fiat- Renault hook up: Renault is already the world’s largest EV maker. Via its 43 % ownership of Nissan it is responsible for the Nissan Leaf and in Europe the Renault Zoe.
Renault is is in a good position with the emphasis on French nuke power to charge the cars. Most will be used for town cars that can get around efficiently in shorter trips.
Nevertheless, the greenies will have to acknowledge that they are nuclear powered cars.
“Figure out how to come up with a self-sustaining business model, make consistent profits, and be cash-flow positive. That would allow it to survive.”
That just isn’t going to happen. Any investor throwing money into this company may as well be burning it in his backyard. I knew eventually this company would go Bankrupt. It’s a bankrupt business model relying solely in government subsidies to survive. On top of that, a CEO with his head in the clouds (literally blowing pot smoke clouds) having no clue how to run a profitable company.
Elon to the moon & then crashing with a loud thud back to earth (& reality). It’s only a matter of how long now.
In non crazy QE and cheap and easy ZIRP money times.
If there is a good chance a company is going to go bankrupt in 10 months, they better pay a heck of a lot more than 9% on their bonds to attract any investors.
9% means about 7 years until I get my principal back.
This company is not going to make it even three years.
Gives new meaning to the word “DREAMERS”.
Not sure the analysts really know what you own in a share of TSLA. He might spin off the various projects at some point, but that is always tricky. I don’t trust him and I sure don’t trust the underwriters. I have seen it before the previous stock owners get x% and new stock buyers get the whole thing. Which is what he needs, new buyers. After it becomes clear the arbitrage players will figure it out.
Ambrose, I was hoping you or one of the other smart people here could answer that question: what happens to the technology innovations when TSLA goes tits up? Or is it possible that the innovations are no longer so, now that the big manufacturers are in the game?
The critical tech is as Wolf says the battery, and he is just an interested third party as I understand. But what does Bill Gates really know? He runs a business. The car business is mature and saturated. The boutique car business is always good, Ferrari, Lamborghini. Maybe that’s all this is about? An electric motor in a fancy Italian body. The subway and the rockets are just window dressing? The thing is beginning to define itself, and that allows the backers to manipulate the message. It seems their “tech” is mostly smoke and mirrors, which is probably okay with the backers.
The model S runs on ~6,900 18650 batteries. The 18650 battery is common in flashlights, power tools and some laptop computers.
My friends with Tesla cars love theirs. Model 3s, Ss, a X and a Roadster. Some just went to a gathering in South Dakota, enthusiasts drove from the East and West coasts.
Ethan in NoVa – I had to look it up, got this:
BTW I’ve seen thriving small or small-ish biz’s that did nothing but sell batteries and repair/rebuild/make custom battery packs. Generally when someone needs a new battery or battery pack for something they need it NOW.
The law of nature (physics and chemistry) restrains battery efficiency. The energy density of the most efficient theoretical battery concepts (Li – air) would just in the range of gas or diesel, but only without taking considerable constructive constraints into account. And who would be willing to ride such a bomb? Because one great advantage of gas, diesel, methanol, methane, hydrogen fuel is that the oxidser for the combustion is not carried along in the car, but is taken from the air, i.e. oxygen. Hence, such fuel is very safe, it cannot burn without oxygen supply from the outside, in contrast to batteries. And, by the way, this makes these fuels so energy dense, too, because the car needs to carry only 30% of total fuel weight (molecular masses C = 12, O = 16, CO2 = 44)
Ugh, no wonder I hate reading comments. Just purely uninformed if someone thinks that the 18650’s are anything special.
Tesla has quite a bit of nice tech under the hood/wherever if you know anything about the company.
Not to mention possible margin calls on all the stock-backed loans for Musk himself…
This may sound kind of crazy, but a 10:1 split would enable a 19 dollar share price and could lure in the low end ‘investors’.
brilliant. it could work
I would buy at $20
Why wait? If you have 9 friends who also don’t understand math good, you can each chip in $20 and buy a share now. You’ll even have $8 change…Wait $9…No, $10…Hold on $11…
Maybe wait ’til tomorrow, you’ll only need 8 friends ;-]
To my surprise it actually looks like they are ahead of schedule in China ?
Thoughts on that ?
“To my surprise it actually looks like they are ahead of schedule in China ?
Thoughts on that ?”
A car factory isn’t complete until it’s building cars. Installing and tooling equipment will take a while. I wouldn’t put it past Musk to ship in partially completed Model 3s, finish assembling inside, and roll them out for a photo op.
And then twits: “China market secured”
If Musk switch Palo Alto with his giga factory to
produce Model T, he might survive.
A useful basic car, the inverse of the current top of the line self driving machines with radars, lasers, software and cyber for protection. No eagle doors, fancy tires, or sophisticated cockpit. A simple elegant car with an electric engine and a battery to accommodate the masses, not the defense department or the US president.
Target the bottom line, not the Alta ego.
The goomint would not allow it to go on the roads.
I agree that EVs would be more attractive without A/C and backup cameras and unintelligible driving aids. I can’t even get the radio to pick up AM.
I’m always amazed at how the comments section changes when fortunes change for the latest media darling.
Where are the Tesla fanbois now? Have they gone in search of greener techno pastures?
I’m with you Wolf. Regardless of what happens now, Mr. Musk won’t be relegated to Tucker status. He has already accomplished the electrification of the consumer mind. This legacy is firmly established.
People forget that Tesla owns the most valuable real-world driving data in the world. The number of miles-driven in their AI and analytics dwarfs anyone else. They could base exit/rescue strategies on this IP. Yes it sucks for current bondholders and stockholders. But I don’t feel sorry for them. You’ve been pointing out Tesla’s crazy valuations from the beginning. If they want to ride the roller coaster, they can’t get off in the middle after they change their minds and decide it’s not fun anymore.
If Tesla’s fair-weathered friends have abandoned it, we might be cautiously optimistic that market discipline (and yes, maybe BK) will bring us strong battery supply for years to come (that being the focus of the gigafactories). And that’s a good thing.
Let me explain to you contract law in America when a company enters bankruptcy – and not with an obama bailout to favor a politically connected union.
Stockholders get wiped out. Bondholders take ownership of the company, management and assets.
A bankruptcy judge decides who gets what unless the bondholders strike a deal among themselves.
The bankruptcy judge could agree with the deal (sometimes called a prepackaged bankruptcy), make his own deal or liquidate the company.
“Yes it sucks for current bondholders and stockholders”
I want to yell at Wolf because he talking fundamentals in a market that doesn’t care about fundamentals. It’s all about creating financial products investors will buy. I’m still a big Musk fan because he is the only one in tech truly innovating. As far as Tesla is concerned, it’s not about the cars. I have a different take on the whole situation.
And here’s my take, pension plans and insurance companies will line up to buy the Tesla bonds because they need the yield and rating. These bonds will in turn feed the derivatives market, being chopped up into shorter duration high yield instruments. The market for the shorter term derivatives will help the stock price.
It’s an upside down world. The stock used to help the bonds and derivatives, now it may be different. Maybe another cutting edge innovation.
I’ll take the other side on that, at the peak of the bubble irrational technology projects get funded, but we have passed that high. Now you better make it work. While pension funds might buy 100yr Argentine bonds in US dollars (and the IMF will bail them out) they will not buy Tesla junk bonds. If my pension fund constituents thought that was happening there would be open revolt against the board. We are in that part of the cycle where a lot of good technology and research (which has a time stamp on it) will get sold at distress prices.
I know most of the animus against Musk, in the markets, is that he is not monetizing his technology at a pace to their liking. However, your assumption that pensions, insurance companies, and/or hedge funds, are not buying anything with a yield and a heartbeat(rating), is just wrong.
I don’t know about the US but in Canada pension funds wouldn’t be allowed to touch bonds 6 grades into junk.
Nope, exactly in what way is all a. data gathered from Teslas b. Then machined learned, don’t be vague, c, and then applied. This is called a fantastical
“AI and analytics dwarfs anyone else”, where you get that gem, from one of Tesla’s fanboy hype machine websites. Do you remember we were promised ‘level 5’ enabled taxis in 2016? AI goes back as far as 1956 at Dartmouth College. The snake-oil salesmen of the SF bay area like St. Elon made AI sexy, meanwhile bilking investors out of of billions of dollars.
TSLA is toast no matter what the scenario
1 China- does anyone really think that China will allow an American owned car manufacturer to sell cars in China , while the trade war only escalated
2. Other car manufacturers – every other car manufacturer will be producing EVs in numbers by 2023.
3. TSLA cash burn- TSLA has to either cut costs radically, raise prices of its cars or sell more vehicles. All three are very unlikely
4. Stock market crashes
Those companies with the least amount of cash flow will go down the most
Maybe it’s my monitor, but for all the bankruptcy speculation about this company I never seem to spot even a sketch of a bankruptcy scenario.
This paints a picture of a company more than three years ahead of the competition that’s doomed for the reason that it might not continue to do what it has been doing year after year, for years. And even if the stock market crashes, it holds the stock will just fall, not get wiped out.
This guy says all roads lead to an acquisition, but again relies heavily on all the other car companies catching up years from now, huffing and puffing:
The price Elon Musk could name and would get for the company while able to tap the equity markets would blow away all precedents.
Why doesn’t TESLA pay its suppliers?
I think I have finally figured out why the fascination of Joe SixPack for Tesla cars!
Yes, big bad-ass trucks!
Self-drive Tesla cars are fatally attracted to big sexy “parked” red fire trucks!
Love being blind, head strong Teslas have also tried loving other fixed objects, like guard rails, medians, and even ugly moving semi trucks!
So who is going to be the first to unplug Tesla’s battery?
Musk apparently found a competent CEO to run SpaceX; why couldn’t/didn’t he do so TSLA?
Space-X doesn’t make money either…
All EVs are mere toys.
Tesla can follow GM’s 2009 purge model.
move all the real assets to a new company then IPO again.
Anyone else see ZH post about the PPT head resigning today ? uh oh look out below.
On one hand you have insightful breakdown from Wolf on Tesla and where the company is headed and headwind, on the other you have Tasha Keeney with stuff like below…either Tasha is the smartest person on the planet and we’re all insane. $4k a share? Why not make it $40k a share if we’re all insane anyway..
Seeing the BOM…it’s impossible to believe Tesla isn’t making a shitload of money. Everything but the battery is inexpensive, and the battery ain’t that much.
I think a surprise to the upside is in store. Any time so many are calling to short, its gotta be a long
Most likely you are correct, it will take a very long time for gravity to reassert itself, springs are coiled waiting for breakouts wherever they can be found in this manufacturing-lite economy. Heck we’ve lost most of Boeing’s ability to justify the US’s stake as a major manufacturer without the stock market reacting, hope is at a premium with the likes of Musk and the hat rabbits.
The world would have been moving towards EVs at this time whether Musk existed or not. The youth are literally rebelling at the future we are leaving them. And at least a few adults care about that too. We saw a week of protests in London from Extinction Rebellion. And the Greens just surged to gain seats in the EU elections even though all the right-wing media wants to talk about is the far-right parties.
Formula E racing is in its 5th season now. And manufacturers, except Tesla, have all been there. Now we are seeing companies like Audi ditch their diesel hybrid racing programs and go full on in EV racing. Except, Tesla doesn’t race, probably because you can’t hide incompetence from a stopwatch, and you can’t promise to have your race car at the track some time in 3 months after the race.
All of this would be happening if E. Musk didn’t exist. In fact, I wonder how much of a drag E. Musk has put on the move towards EV? He’s sucked a ton of money into what appears to be a failing effort. Wonder what that money could have done if it had been backing a competent manufacturer? And, if EVs need a stable image to get families to start buying them, I’m guessing E. Musk and his bong ain’t it.
If there is such an incentive to get a bounce in the stock, does it make any sense to bet a few dollars on calls?
Obviously. Not to mention doubling down when those calls are on half-off sale.
It is fun to read reviews etc regarding Teslas cars, it is similar to when the iPhone was hot ….
Me thinks Tesla is the De Lorean of our times.
This is the 3rd bubble I am witnessing. Tesla is one of the poster childs of this bubble. The bigger the bubble the bigger the frauds.
I am long TSLA LT puts since more than a year. Still a long way to go. Patience is key.
The Tesla model 3 seems like a glorified amusement park bumper car, and it sounds like one too. Perhaps it is this connection with youth that has compelled people to buy the Model 3. Indeed, Musk had the child-like qualities, face, and dreams to carry this theme.
Interestingly, the whole Tesla experience was similar to that of a financial amusement park. When the experience is done, you leave the park and enter the real financial world, where cash flow and debt matter.
In a few years, Tesla will be remembered as a fantasy play and not a viable automotive concern or investment. Like children crying as they leave the amusement park, the Tesla believers need a little extra time to exit, but the tears will dry up quickly as they leave the park and the next big distraction comes into view.
I have been convinced by the work of Adam Tooze and Mark Blyth that cash flow is not the issue–capital flows are. The global rich are now so rich that it is the sloshing around of their money that makes markets go up and down, not anything so banal and concrete as cash flow or profitability. If the people with the money want a market to survive or thrive, it does. If they want to choke the life out of it, they can. China and Russia are partially protected from this dynamic by their size and the nature of their political economies. Ditto the USA. But the rich today are so much richer than they were 50 years ago that they can keep throwing money at a loser almost indefinitely. Telsa could survive through sheer perversion. Only a massive liquidity crisis will reverse this trend. That will dry up the capital flows and change the game. A little thing like profitability won’t.
I thought the Model 3 was going to make Tesla cash flow positive to accrue profits? Wha’ happened???
Turns out all three of Musks companies don’t live up to the hype, and they’re all scams:
Boring’s Hyperloop turned out to be a tunnel with one car driving through in one direction.
Space X is Marvin the Martian’s earth-shattering Kaboom!!!
Tesla- not safe at any speed.
Article today. Tesla getting sued for not paying a supplier. Reading the court document was interesting.
Time will tell if this is an exception, or becomes the norm.
A couple of points that I disagree with: First battery technology is not improving by leaps and bounds. Batteries are a mature technology and chemistry where improvements have been in the order of 1 or 2 points per year for the last thirty years. Secondly Musk didn’t invent or create the EV market. Market forces, governments, subsidies, environmental concerns were the driving force. Musk saw a way of using the hype and the subsidies to get into the game. And one point that I can agree with since it has been obvious for ten years now: Tesla has no business plan that will every allow it to become profitable or cash flow positive. And that means BK sooner or later in a capitalist world.
Tesla…any time someone mentions him…prepare for utter
fantasy…because “Tesla knew things” …that we still don’t
know today. This belief that he some unknown “scientific
knowledge” is at the foundation of all the TESLA MYTHS.
Here we are on June 3rd and TSLA down nearly 7 bucks despite the news that it has sold more credits to GM and Fiat (terms not disclosed of course).
Share price has to hold this level otherwise the next support is in the 140 to 160 range.
Only good news today concerns the bonds. Not going down. Still maintaining the holding pattern in the 81’s.
Left out last part of last sentence: get bought out by an existing automaker.