Elon Musk Acts Like a CEO, and That’s Why Tesla’s a Buy

Tesla recently delivered its quarterly earnings report and the news was pretty much in line with what many analysts had expected. The Wall Street Journal reported,

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  • “Tesla more than doubled its loss from last year’s second quarter to $717.5 million, its seventh consecutive quarterly loss during an period intensely focused on ramping up production of the Model 3. Tesla reached the long-delayed goal of making 5,000 Model 3 sedans in a single week during the final days of June. Now the test is whether it can sustain that production to generate necessary cash and eventually prove it is no longer a niche luxury brand but one capable of building millions of cars a year.

    “It took 15 years to execute on our initial goal to produce an affordable, long-range electric vehicle that can also be highly profitable,” Mr. [Elon] Musk [the company’s CEO] wrote in Wednesday’s shareholder letter. “In the second half of 2018, we expect, for the first time in our history, to become both sustainably profitable and cash flow positive.”

    Musk said he plans to focus on paying down the company’s debt—not refinancing it. He expects a new factory proposed for Shanghai will cost $2 billion and will be financed with debt in China.

    But, analysts were watching the cash flow for insights into whether or not those goals were possible. Tesla finished the second quarter with $2.2 billion of cash. Its negative free cash flow of about $740 million was lower than what a consensus of analysts expected.

    Source: The Wall Street Journal

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  • Ther report continued in what is a fairly standard process for Wall Street.  The CEO was optimist and Musk even said he expects Tesla will record a profit in all subsequent quarters of the year unless the economy collapses, or he decides the best use of cash if repay a loan.

    Analysts Were Really Focused on the CEO

    What was different about that earnings report was the fact that the focus was on the question of how Musk would behave.

    Three months earlier, Musk had blown up at analysts in the conference call. As MarketWatch noted at the time,

    “When Bernstein analyst Toni Sacconaghi attempted to ask about capital-expenditure spending and the money needed, Musk cut him off by yelling “Next!” When RBC Capital Markets analyst Joseph Spak then asked how many people with Model 3 reservations were actually taking delivery of their cars, Musk declined to answer any more “boring,” “dry” questions.

    “You’re killing me,” he said.”

    The stock, already under pressure, fell in response to the rant.

    Since then, Musk has raised concerns among analysts with continued Twitter tirades which even included insulting one of the rescuers of children trapped in a cave in Thailand.

    Musk acknowledged his performance on the last call failed to meet expectations,

    ”There’s really no excuse for bad manners,” Musk said, noting that he’d been logging heavy hours at work but conceding that, in the end, that was “no excuse.” He followed up by apologizing to RBC Capital Markets’ Joseph Spak, whose question he’d previously called “dry” and declined to answer. (Both men accepted the apology.)”

    And, the apologies were well received as headlines noted, “Elon Musk’s apology was worth more than $8 billion to Tesla shareholders.” The jump in price is notable on the next chart which uses longer term data and shows monthly bars.

    TSLA is near its all time highs, a significant rebound in just the past few months. But, questions remain.

    The company did end the quarter with more than $2 billion in cash on its balance sheet but that includes more than $900 million of that is comprised of generally refundable customer deposits. The balance sheet also showed that total accounts payable exceeded $3 billion.

    The company used more than $700 million in cash for the quarter and is expecting to spend about $2.5 billion this year on capital spending which includes factories and equipment. Some analysts worry that’s not enough capital spending for a car company.

    Others worry that the company is hiding problems by making short term decisions that make the company appear less cash intensive. Layoffs have been announced and about 9% of employees are expected to be eliminated, saving cash flow.

    These questions, however, are insignificant if the company can deliver product. The figures all speak for themselves in some ways.

    Tesla is holding more than $900 million in customer deposits. No other car company is in a position to demand such deposits from its customers and the fact that customers are paying deposits is a bullish indicator of demand.

    The cars are highly sought after and despite mixed consumer reviews do appear to be selling. That is the most important metric of a company’s future potential. A product that is in demand could help a company overcome a multitude of mistakes.

    For now, analysts expect the company to turn profitable next year reporting earnings per share of about $2.20. In 2020, the estimates are for EPS of about $8.50. Estimates for 2020 range from a small loss of $0.12 to a high of $19.26.

    If Musk does meet consensus estimates, the stock price should soar. If he meets the highest expectations, the stock could reach $1,000 a share or more in a few years. This indicates that despite the high price today, Tesla could be a bargain.

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