Whitney Tilson’s email to investors discussing Tesla Inc (NASDAQ:TSLA)’s shifting capital raise narrative.
An FT reporter finally got a hold of Musk’s delusional, fraudulent, Reg FD-violating $500-market-cap, million-robotaxi-within-15-months conference call…
Just under three weeks ago Tesla announced it planned to raise $2.3bn from the capital markets in the form of convertible notes and equity.
On that day, May 2, Elon Musk took to a conference call with the obliging banks and, according to CNBC, laid out Tesla's autonomous-taxi driven road to a $500bn market capitalisation. On May 3 Tesla announced the amount offered had been upped to $2.7bn. Clearly, investors were convinced by the cut of Musk's jib.
But the autonomous robo-taxi fleet wasn't the only selling point. According to an audio recording of the call obtained by Paul Huettner, a New York City-based restructuring professional, the first question Musk was asked was why Tesla was raising capital now?
We don't expect to spend this capital. We expect to fund our activity out of ongoing cash flow. It's probably wise to have at least some cash buffer. Between now and summer next year there could be an automotive recession, or a decline in demand, and we want to make sure we're resilient through any economic downturn . . . it is not our intent to use this money but have it there as a contingency fund.
Fast forward to two weeks later, and something's changed. Drastically changed.
In an email to employees, obtained by CNBC on Friday, Musk wrote (with our emphasis, skip down to the bold bit if you can't be bothered to read the whole thing):
As mentioned at the company talk, it is extremely important that we examine every expenditure at Tesla no matter how small, and be sure that it is critical.
When making hundreds of thousands of cars, battery packs and solar systems, even a ten cent savings could be worth over $50,000 a year. There are over 10,000 unique parts and processes at Tesla, so making small improvements across the board has a giant cumulative impact.
At the same time, we must also continue to make our products subtly better in thousands of small ways.
It is important to bear in mind that we lost $700 million in the first quarter this year, which is over $200 million per month. Investors nonetheless were supportive of our efforts and agreed to give us $2.4 billion (our net proceeds) to show that we can be financially sustainable.
That is a lot of money, but actually only gives us approximately ten months at the first-quarter burn rate to achieve break-even. It’s vital that we respect the faith investors have shown in Tesla, but it will require great effort to do so.
That is why, going forward, all expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must be reviewed, confirmed as critical and the top of every page of outgoing payments signed by our CFO.
I will personally review and sign every 10th page.
Please examine closely every expense where responsibility is, or probably should be, assigned to your group. If in doubt, assume it is on your plate, so that we don’t have anything slip through the cracks.
This will take at least a few weeks to get right. Please don’t worry if it isn’t correct at first.
This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable.
Thanks again for your excellent work,
In two weeks, the $2.4bn in cash has gone from being a “contingency fund” to being potentially burnt in “approximately ten months” unless changes are made to its expense structure.Changes so large that every expense has to be signed off by CFO Zach Kirkhorn.
Readers may also note that the first quarter's capital expenditures were at their lowest levels since 2016:
Suggesting that if Tesla is going to deliver the half-dozen or so new products promised, further capital expenditure will be needed.
We asked Tesla about the change in language around the use of the fresh capital, but the company did not respond to multiple requests for comment over the past 24 hours.
Investors in the raise may feel miffed. The new equity was priced at $243, but after an initial bounce on the day of the raise, Tesla's shares yesterday closed at $205.36 — a 15 per cent loss in just over ten trading days. In pre-market Tuesday, they're once again touching the $200 mark.
Perhaps more tellingly, Tesla's 2025 bond is offering an 8.97 per cent yield, according to Bloomberg data. That's a 671 basis point spread over treasuries, the largest since the $1.8bn bond was issued in August 2017.
The sentiment shift isn't just among investors. Tesla's once optimistic analysts are growing increasingly concerned. Yesterday, long-term bull Daniel Ives of Wedbush reduced his price target on the business to $230 from $275. At the turn of the year, he had a $440 price target on the company.
Similarly Adam Jonas of Morgan Stanley, in a note published this morning dropped his price-target under a worst-case, or bear case, scenario to just $10 from $97 over concerns Sino-US trade tensions, among other things, will upset long-term demand.
Then there's Ben Kallo of Baird, who still holds an “Outperform” rating on the stock, but reduced his price target Tuesday morning to $340 from $400 (it was $465 in January). However, the outperform rating may not last long, from the report:
...we could move to the sidelines if the stock price continues to fall to a level where we think it could seriously impact business fundamentals and/or there is substantial data in support of a demand issue. We think TSLA stock is a prime example of reflexivity, whereby stock price declines can impact business fundamentals, including recruiting and retaining talent, financing growth, and possibly even consumer demand.
At pixel time Tesla's shares were trading down 3.65 per cent in pre-market, to $197.87.