Tesla Motors Inc (NASDAQ:TSLA) Running Out of Energy


Tesla Motors

Tesla Motors

“SpaceX has a rocket blow up on the launch pad, but it’s ok because now they’re going to colonize Mars.” – Sam McBride of New Constructs

The escalating promises from Elon Musk are running out of credibility. Words alone cannot fix the fact that Tesla (TSLA: $198/share) is quickly running out of cash, faces a strengthening competitive market and has extreme optimism baked into the current valuation of the stock. You know sentiment is shifting against Tesla when savvy short sellers like Jim Chanos join the fray. For all but the cult followers, frankly, shorting Tesla is an easy call given the hype in the valuation of the stock.

Tesla Motors  – Issue #1: Cash Losses Accelerating

In terms of true profits (as opposed to GAAP or non-GAAP profits), Tesla has never been profitable. The company’s economic earnings have declined from -$195 million in 2010 to -$1.4 billion in 2015 and -$1.7 billion over the last twelve months (TTM). The rapid decline in economic earnings comes despite revenue growing 103% compounded annually from 2010-2015. Further highlighting the profitability issues at Tesla, the company’s after-tax profit (NOPAT) margin has deteriorated from -2% in 2013 to -18% TTM, while the number of cars delivered has nearly tripled, per Figure 1.

Figure 1: Tesla Motors  NOPAT Margins Heading The Wrong Direction

Tesla Motors  NewConstructs_TSLA_DecliningNOPATmarings_2016-10-17
Tesla Motors

Sources:   New Constructs, LLC and company filings.

Issue #2: Non-GAAP Masks Severity of Losses

We’ve previously identified (as has the SEC) Tesla as one of the worst offenders when it comes to use of misleading non-GAAP metrics. Non-GAAP metrics allow a company to mask the severity of losses or even create the illusion of profitability. Tesla’s non-GAAP metrics greatly overstate the true condition of the firm. Per Figure 2 below, Tesla reported a non-GAAP loss of -$294 million in 2015, despite economic earnings reaching -$1.4 billion in the same year.

Figure 2: Discrepancy Between Non-GAAP & Economic Earnings

Tesla Motors  NewConstructs_TSLA_NonGAAPvsEconEarnings_2016-10-17
Tesla Motors

Sources:   New Constructs, LLC and company filings.

Tesla’s decision to remove stock-based compensation from its non-GAAP metrics accounts for much of the discrepancy seen in Figure 2. In 2015, the company removed $198 million (5% of revenue) in stock-based compensation expense when calculating its non-GAAP net income. Furthermore, Tesla’s $3.3 billion employee stock option liability shows the company that trying to ignore these costs does not work. If Tesla were in a decent financial position, it wouldn’t have to rely on stock options to pay its employees, which brings us to issue #3, Tesla’s significant cash burn.

Issue #3: Burning Through Cash & Constant Need For Capital

It’s no secret that building a car company from the ground up requires significant capital. However, Tesla’s cash drain shows no signs of slowing as the company ages. Since 2011, Tesla has burned through cumulative $7.4 billion in cash. The rate of cash burn is only accelerating, per Figure 3. In 2015, TSLA’s free cash flow (FCF) sat at -$2.2 billion and over the last twelve months, FCF has worsened, to -$2.9 billion. Don’t expect this cash drain to stop anytime soon, as Oppenheimer estimates TSLA will need $12.5 billion by the end of 2018 to manage a combined TSLA & SCTY, despite Elon Musk’s claim that a capital raise would not be needed in 2016.

Figure 3: Tesla’s TTM Free Cash Flow Is -$2.9 Billion


Sources:   New Constructs, LLC and company filings.

It’s important to note that Wall Street and investment banks love the large cash burn because it means big money when TSLA raises more capital. Were Tesla to raise capital again, it would be the seventh capital raise since 2012. Tesla has raised more than $6.5 billion in these issuances, which include:

  1. $222 million in October 2012 through an equity sale.
  2. $1.1 billion in May 2013 through debt and equity offerings
  3. $2.3 billion in February 2014 in convertible debt
  4. $750 million in June 2015 as a credit line
  5. $738 million in August 2015 through an equity sale.
  6. $1.46 billion in May 2016 through an equity sale.

Investment banks make big money when helping companies raise capital; so you should not be surprised to see positive ratings on TSLA from Wall Street analysts. Meanwhile, investors are increasingly diluted.

Going forward, the Solar City (SCTY) acquisition looks to make the cash burn much worse, which brings us to issue #4, corporate governance regarding the SolarCity acquisition.

Issue #4: Questionable Governance Surrounding SolarCity Acquisition

When TSLA and SCTY shareholders vote on the proposed merger on November 17, investors need to question whether this merger is just another promise by Musk to distract from larger issues facing both companies.

We’ve previously raised concerns about Tesla’s proposed acquisition of SolarCity (SCTY). When the deal was announced, Tesla would be paying $27.50/share for SCTY, at which price the deal would earn TSLA a -9% ROIC. At the same time, we found that in order to earn an ROIC equal to its weighted average cost of capital (WACC), the most TSLA should pay for SCTY was ~$3/share. More recently, noted short-seller Jim Chanos called the acquisition “a shameful example of corporate governance at its worst”, and he makes an important point. Apart from the dumbfounding misallocation of capital, there is significant overlap between the executives and board members of both TSLA and SCTY. Acquiring, or rather bailing out SCTY, a previous Danger Zone stock, not only allows Elon Musk to save the company from potential bankruptcy, but also helps line the pockets of executives along the way.

We also find it odd that Tesla chose not to disclose plans to buy SCTY during its most recent equity sale. We believe investors would have been less willing to buy shares knowing that TSLA would be paying a significant premium to purchase a money losing company. Misallocations of capital and withholding material information aside, one of the biggest issues facing Tesla comes from outside the company, which brings us to issue #5, increasing competition

Issue #5: Profitable Competitors Are Now Entering The Market

A month after our initial report on Tesla, we followed up with short commentary on General Motors’ (GM) plans to introduce an all-electric vehicle. At the time, Tesla’s affordable mass-market car was still only a rumor, and later turned out to be the Model 3. As it turned out, GM was only one of many automobile manufacturers readying electric or hybrid vehicles to compete directly with Tesla. In fact, nearly all major auto firms are either producing electric vehicles, such as the Audi A-3 e-tron, BMW i3, Chevrolet Volt, Ford Fusion Energi, Nissan LEAF, Volkswagen e-Golf or the Toyota Prius, or have plans to do so in the near future.

More recently, Chevrolet announced details surroundings its mass-market electric vehicle, the Chevy Bolt. The Bolt is expected to have a greater mileage range than Tesla’s Model 3 (based on Tesla’s initial range expectation) and is expected to reach dealerships in late

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