The stock is crashing. Then, the entire market is on a downward trend. That does not take away from the fact that Tesla is crashing for some reasons unrelated to the rest of the market.
I figured out 2 things about the stock market a long time ago: 1) It is legalized gambling; and 2) It is not rational. Anyone who says different is a stock broker.
What are the threats to Tesla that are apart from the normal ups and downs of the stock market?
1. Concerns about Model 3 production.
2. Tesla’s debt load and Moody’s downgrade to a BBB credit rating today.
3. The crash of a MX on a California freeway.
Model 3 Production
Suppose Elon Musk had said something like this instead of what he did say early in 2017: “We are putting in an entirely new way to manufacture a car that is 90% automated. There will, naturally, be a learning curve before we can reach full speed. Our goal is to reach these milestones in 2018: 2,500 vehicles a week sometime early in the year, 5,000 around midyear, and 10,000 by the end of the year.”
Would the trashing we’re seeing now be as loud if Musk’s projections had been less rosy? I doubt it. Instead of giving him a pass for innovating how cars are assembled, the press and hedge funds would be all over Tesla for: 1) being under capitalized; 2) just more vaporware, electric cars are too expensive for the average person and there is no getting around it. Hedge fund managers and market experts would be hammering Tesla on those grounds right now.
Tesla is not just another start up car company, even those are rare. What Tesla is doing threatens to disrupt several established industries. The establishment doesn’t like that. First and most obvious, it forces legacy carmakers to blow apart their business models. They’re used to peddling small incremental improvements to a century old technology. Throwing all that out is disconcerting. Second as equally as obvious, if Tesla succeeds others must follow and that is an existential threat to the oil industry. The Koch brothers and others of their ilk don’t like that. Third, electric cars are much simpler than ICE cars. They require fewer parts and that threatens the livelihood of thousands of companies that supply parts to the likes of GM and BMW. Fourth, Tesla’s sales and service model blows apart the established means for distributing cars, obviously. Tesla has dealt the car dealer out, something we all celebrate (No one likes buying a car from the moron with 12 gold chains around his neck). This is a giant headache. Sixth, transitioning to electric cars requires massive investment in charging infrastructure. Governments aren’t fond of that, legacy car companies accustomed to shoveling off the fueling issue to the oil industry are certainly unhappy about that. The owners of all those gas stations out there aren’t happy either.
In short, there are a lot of gored bulls out there who are tearing up the china shop who delight on jumping on every Tesla failure, real or imagined.
Circling back to M3 production, Musk missed on the timing as he usually does. We’re used to it. Seeking Alpha and Forbes see it as a point of attack. Still, there is valid reason for concern if Tesla is still stinking it up getting that assembly line going.
They aren’t. New robots were brought in and installed in February because some of the ones on the line weren’t working well. This caused a drop in deliveries. If that drop is continuing without an end in sight then that’s really bad for Tesla.
It isn’t. The past few weeks, Tesla has applied for thousands more VINs, a much higher rate than it had been. Bloomberg’s estimate is Tesla is now producing at the rate of 1,026 M3’s a week. Only, Bloomberg warns that actual production is probably much higher of late than its model indicates because of a lag in how the data is applied. Has Tesla hit 2,500 cars a week yet? Probably not. If it’s truly 1,000 then that will cause Tesla problems. If it’s closer to 2,000, then that is much less a problem, particularly if Tesla’s ramp up continues like it apparently is. Is being off a week or two in reaching 2,500 cause for panic? Only if you’re a legacy car maker or a hedge fund manager hoping Tesla tanks. Otherwise, it will be a blip that will soon be forgotten.
As Musk has said, entering the car industry is crazy. The overhead, costs and technical headaches are daunting. To put cars in peoples’ driveways costs a lot of money up front. You need factories, in Tesla’s case a lot of batteries, engineers who don’t come cheap, robots that cost 7 to 8 figures, delivery points to give customers their new cars. Tesla is gambling that the M3 will be a huge hit and has invested in equipment, etc to do it. M3 reviews are hugely positive. Public interest, meaning potential customers, is there in spades. But all that means naught if you can’t make enough cars fast enough to make all that investment pay off.
In reality, Tesla is already churning out a ton of M3’s despite the production problems and the cash is starting to flow. Bloomberg estimates 11,350 M3s have already been delivered. These are all high end, more expensive models. Assume Tesla is clearing $7,000 per vehicle. That works out to 11,350 x $7,000 = $97,450,000 in gross profit in the first quarter alone that wasn’t there a year ago. If Tesla did nothing else to improve production that would work out to roughly $390 million added to revenues above costs for all of 2018. Of course, that figure will be superseded and by a lot.
Some are pointing to a 30% ordering rate for Tesla’s backlog of reservations. That doesn’t matter all that much. What matters is cancellations. Many are waiting for more options to become available and only a fraction of people with reservations have been invited to configure their cars as yet. If 70% are asking for their $1,000 back, that’s a problem. But nobody knows what the rate is outside of Tesla. Those guys are guessing, many through rose colored glasses.
If Tesla hits 5,000 or so cars a week by June/July, the debt problems will disappear. Moody’s will eventually follow suit upgrading Tesla’s credit rating.
The MX Crash
Horrible accident. But like with terrorist attacks, probably overblown. (You’re 35,000 times more likely to die of cancer than at the wrong end of a terrorist’s gun, but what do we do? We spend trillions hunting down terrorists and starve the NIH for bucks to fund research to seek cures for cancer).
What we know is that a MX attempted to switch lanes, hit a concrete barrier between lanes where the whatever it’s called was collapsed due to an accident the previous week and hadn’t been repaired, launched into the air and came down right side up on the freeway and was hit by two other cars. The MX was completely destroyed. Emergency services came and took the driver to the hospital where he unfortunately died. After the ambulance had left, the battery pack caught fire with half burning. NTSB is investigating and there are more questions about autopilot being ready for prime time.
What we don’t know is:
1. Was EAP engaged? No one knows yet.
2. Was the crash due to driver error or the software.
What we do know is that EAP is somewhat misnamed. It’s still traditional cruise control with a few more features. Tesla tells everyone that EAP is not full autopilot and the car turns it off if you take your hands off the steering wheel for too long.
This may turn into a big deal, my guess is it won’t. Anyway, I think we get too far ahead of ourselves as drivers if we think there is full autopilot available. It isn’t. Tesla warns and warns, it’s right there in the manual, but many don’t listen.
Will Tesla fail then? I don’t think so, as long as M3 production is ramping up like it appears to be. I would stay away from the stock for a while until it finds its floor. Then look at M3 production numbers and buy low before the straight press figures it out.
But they gotta start making a whole lot of M3’s, sooner rather than later.