Elon Musk moving past notions of privatization presents an interesting situation for Tesla (TSLA) . Personally, I think the incident as a whole displayed the incompetence of Musk, and removes any confidence I had in his ability to run the business. Barring psychology, I think we're looking at a big pullback in the stock in the coming months. The company might succeed in making its cars, but the cash burn relative to valuation simply doesn't add up. I think this company is one of the biggest examples of overvaluation that is plaguing the marketplace.
The fact that privatization was discussed shows me that Musk isn't competent on the managerial level. He might be an innovator that pushes industries, but he has displayed an inability, or lack of interest, in the financial side. Consider the logic. He takes a non--profitable enterprise public to raise a bunch of cash in order to finance bigger operations. He uses the money, sells the Tesla idea to drive a huge stock price valuation, grows a huge market capital position, and fails to use it. Then, after the company is extremely overvalued relative to its lack of profits, he proposes buying it back at a huge premium in order to take it private again? It makes zero sense. I think there's a lack of realism in Musk that needs to go if this company wants to become a profitable business.
I think Wall Street is as much to blame as Tesla is. Investors created a mythical ideology around Tesla and Musk that simply wasn't real. In a way, shareholders promoted the bubble of the stock because everyone was making money in the process. Wall Street never cares about the truth as long as share prices are rising. Now, when faced with the prospect of needing some actual earnings per share (remember those?), the criticism begins.
Tesla has succeeded in driving sales and consumer interest. But they're losing $700 million a quarter. Diluted shares continue growing. Total diluted shares outstanding increased by 5 million or roughly 2.8% year over year in the second quarter. The cash burn keeps running as the Model 3 production now goes into full swing (way behind schedule I might add), and I can only expect Tesla will spend more cash as the company faces the effects of high level production. Of course all of this has already been discussed. Every facet of Tesla has been analyzed by almost every person with a brokerage account. I won't debate the merits of the business model. What I will debate is the stock price. I feel that as long as Elon Musk as at the helm, the stock has to come down.
With the revenue growth that the company has created, the company could have profited a long time ago. Musk refuses to slow down. He immediately pushes into new things and expects his salesmanship on the market to finance it. That makes for a good story, but it doesn't do much for investors. Now, with a lot of convertible debt coming into play in February, I think Musk is feeling pressure to keep that stock price up. The company has convertible notes of $920 million coming due in February of next year. They don't exactly want to have to pay up on that debt at a time when cash is the key discussion. For Musk, he needs the stock price to be over $3.59 in order for that debt to be converted into stock. This sort of explains his overreaction to shorts and critics. Musk can't raise cash through stock financing right now, because he doesn't want to drive the stock down. If he does, he has to use his proceeds to pay $920 million. I honestly half suspect that privatization talks were an attempt to drive up enthusiasm and get this stock back up.
I'd bet this company will do just about anything to try to produce a profit in the second half, because they need market enthusiasm if they want that stock price holding $360 in February. It's a messy situation.
This is just the opening shot. Tesla has nearly $10 billion in long term debt. How can they service the debt, while also financing their operations? The answer should be from meaningful profitability. But we haven't seen that. One way or another, I don't see a scenario where Tesla doesn't need to raise money. They'll either need to take out debt in order to pay off debt, or they'll need profits to get the stock above $360. Or they'll have to say forget it, issue $3 billion worth of stock, pay that $920 million in debt, and use the rest to finance their business. The profitability option doesn't seem likely. If they do start making money, it'll be a show in order to assuage markets. It certainly won't be enough money to cover their obligations. The other two options either dilute shareholder value, or create more liabilities on the balance sheet.
The company needs a new CEO that knows how to produce cars. Until then, I remain bearish on this stock. There's simply childish behavior coming from the executive level, and it isn't sustainable. Ploys like privatization at $420 a share are ridiculous. Who would pay $70 billion in market capital for a company that does $12 billion a year in sales? He either used it to gain positive attention, or genuinely wants to get out of the public eye because of what's coming. I have no sympathy. This stock is absurdly valued, and there's huge downside potential.
