Tesla On The Edge Of A Precipice – ValueWalk Premium

Tesla On The Edge Of A Precipice

Media often talk about topics related to Elon Musk. Many of these mentions, however, have little to do with Tesla. One of the most famous was the situation in which Musk lit up marijuana during the interview. However, we would like to focus on the company itself. Especially, because there is still a lot to talk about. Over the last months,  we've heard a lot about Tesla from suppliers, employees and analysts. Investors should take their words into account.

Q2 hedge fund letters, conference, scoops etc

What do suppliers say?

In July 2018, Tesla asked their suppliers for so-called “capex rebates”. To put it more simply, due to financial difficulties, the company wanted to recover some money that it spent on the parts needed on production.

Representatives of Tesla argued that the lack of these discounts may eventually hit suppliers themselves. In a camouflaged way, they sent a message: if you do not lower prices, then we can go bankrupt.

Separate issue is the amount of discounts proposed. It was about a refund of 9 to 20 percent of what the company paid since 2016! According to words of one of the suppliers, when such proposals appeared from other companies in the past, it was usually about 1-2 percent.

Tesla also announced that if the partners do not agree to rebates, the company could require payment terms extension from 60 to 120 days.

In addition, recent Tesla's management activities raise concerns among suppliers. In a recent survey, as many as 18 out of 22 Tesla partners said that the Musk's company is financial threat to them (read: it may not be able to cover liabilities in the near future). In turn, 8 out of 22 are afraid of Tesla's bankruptcy.

What do former and current employees say?

Business Insider made a very thorough analysis of Tesla – not in terms of finances, but about employee's conditions. Analysis was based on journalists' relations with 42 former and current employees of the company.

Many interlocutors referred to difficult conditions and a very high pace of work. They mentioned people who resigned after one day or even 2 hours at work. Honestly – this statistic does not impress us. There are private companies that require a lot from their employees and there are people who are not suitable for such work. Impressive were the details and their comparison with competitor's activities.

Employees' stories show that the pace of work is so high, and sanitary facilities in factories are insufficient enough that some employees handle their physiological needs in the hall. In turn, organizational chaos causes workers to be thrown into new responsibilities after few minutes of training.

Bad working conditions translate into frequent staff rotation. Necessity of constant training of new employees, while hastening on production causes a lot of mistakes. It is enough to mention the situation from the last week of June 2018, when 5000 pieces of model 3 were produced, of which as many as 4,300 had to be improved! That's as much as 86% of the total number.

Concerning information about what is happening in Tesla factories is confirmed by below statistics.


source: zerohedge

According to the graph, 300 of emergency 911 calls were made to Tesla's Fremont factory (due to accidents, safety breach, etc.). For comparison, GM factory in Lake Orion was called 9 times.

Finishing the topic of employees, it is worth mentioning former directors who quickly left their jobs in Tesla, and some of them found employment with competition. Particularly noteworthy is the head of accounting, who resigned after less than a month!

What do analysts say?

Very rarely we pay attention to what all kinds of investment “specialists” and “analysts” say. Tesla is an exception. Reason is very simple: so far, analysts setting 350 USD target per Tesla share was something normal. Now it is slowly changing.

Analyst Gene Munster, usually extremely positive about Tesla, struck the company's management board, claiming that most of management should fly out of the office. Otherwise, Tesla's future is drawn in gloomy colors.

Morgan Stanley also has cut its worst-case scenario from 97 USD to 10 USD due to increasing concerns about company's debt and geopolitical exposure. Analysts emphasized that they especially are worrying about demand in China (the largest car market in the world).

Of course, shares target price is irrelevant in this case. Trends among analysts are more important. First, we had huge optimism and positive comments about the company. Now, there has been a change in expectations, and further signs of trend reversal will affect many investors.

What does the debt market say?

Just over a half year ago, Tesla issued bonds with a maturity of 2025. Interest was huge – company managed to collect 1.8 billion USD, which is 20% more than management expected. The bond yield was 5.3%.

Currently, situation does not look that great. Tesla bonds yield reached 8.35%, which means very high investors' fears and lack of demand for the company's debt. For those who have purchased bonds, this is equivalent to an 18 percent loss.

In one of interviews, Mark Faber stated that he does not remember case of any company with similar market capitalization to Tesla, that bond yields were so high.

Where to look for positives?

For a long time, Elon Musk himself was Tesla's strength. Regardless of company's results disappointments, the CEO was able to inspire investors' faith, and share prices were rising without any logic behind it.

Over the recent months, Musk himself begun to make more mistakes. Certainly the biggest mistake was Tweet from August 7, 2018, in which Tesla CEO suggested that “the company will be bought out at 420 USD per share and funds are already secured.” Market reaction was clear – shares spiked up. Who would not want buy it for 350 USD, and then receive 420 USD? After all, the market started to doubt in Musk's words. He also began to withdraw from his declarations, thus it became clear that he simply lied.

The problem is, that by his words rising stock prices, many short-sellers were forced to close their positions with a loss. The Securities and Exchange Commission has conducted an investigation after which has forced Musk to step down as chairman of Tesla, but he remained CEO. In addition he had to pay a 20 mln USD fine and agree to have a lawyer who will pre-approve tweets about Tesla's financial conditions, sales or deliveries.

By the way, why anyone would buy so extremely expensive company? From the point of view of institutions specializing in acquisitions, a better idea would be to cut the company from financing. Bad news would lead to a drop in share prices and then you would be tempted to take over. In our opinion, there is no shortage of those willing to take over Tesla, but not with such extreme valuation. Price to Book Value on that time was 12.83 for this company, while in case of ETF for the automotive sector it was 1.02.


The best commentary about Tesla's situation is the fact that Elon Musk so far considered as the biggest advantage of Tesla, has started to be perceived by some as … the biggest threat. More and more people have doubts whether an investment in electric car manufacturer is a good idea. On the other hand, players who did not let go – Tesla is still one of the most shorted companies, have been well rewarded over the last months. Below is the graph of Tesla's stock prices.


source: stockcharts.com

As you can see, company's prices has dropped to as much as 180 USD per share, and then went back up to 233 USD.

For us, however, production data, as well as information provided above, are the confirmation that Tesla is the TOP 3 of the most overvalued companies on the American stock exchange. We believe that the optimal price of the company's shares is 40 USD, and we won't be surprised if it will go lower than that. Competition on electric vehicles market is sharply growing, and history shows that being a pioneer in a given market does not guarantee success. Yahoo or Nokia are great examples of that.

Article by Independent Trader

Saved Articles