I mentioned Tesla (TSLA) in the Real Money "Stocks We Hate for October" series, and noted that the company's earnings results would be the next major catalyst for the stock. Well, if you sold Tesla in October, you would be happy now, as the shares are plummeting today after Tesla's disappointing earnings results, which included an extremely disappointing outlook for production.
Tesla managed to burn through $1.61 billion of cash before financing activities in the third quarter, an astounding amount on a quarterly revenue base of $2.98 billion. The company's projections for production, gross margin and capital expenditures indicate that the cash burn figure could be just as bad, if not worse, in the fourth quarter.
By my calculations, Tesla produced negative EBITDA (adjusted for stock-based compensation) of $125 million in the third quarter. Companies that lose money at the EBITDA level are generally considered "distressed" or worse by the bond markets. Tesla issued $1.8 billion of debt with an eight-year term and a 5.5% coupon in August, and those bonds are plummeting along with the stock today. I am seeing those bonds quoted at 94.84 cents on the dollar on FINRA's TRACE system as I write this. TSLA's bonds hovered around par (100 cents on the dollar) in September and had been trading at 98-99 cents on the dollar in late October.
The bond market is rightfully concerned about Tesla's massive cash burn, and the simple fact is that Tesla never should have issued "straight" debt in the first place. For all his technological brilliance, CEO Elon Musk seems to have little to no understanding of the workings of the capital markets. When the stock markets are willing to value your company at over $50 billion with no pathway to profitability, why worry about how the sausage is made?
Tesla subsisted for years on convertible debt offerings in which the imputed value of the call option more than offset those bonds' ridiculously low coupon rates (0.25%, 1.25%, 1.5% and 2.375%, respectively). If a skyrocketing stock price is consistently increasing the value of the imputed call option, a convert investor might overlook the low coupon rate for a cash-negative company, and many did.
Again, though, non-convertible debt is a completely different animal than convertible debt. Straight debt is for the Exxons and Fords of the world, with measurable cash flows that can be discounted to reflect how heavily cyclical their industries are. Instead of tapping the credit markets, Tesla should have issued another convert or more equity when the stock was trading at $380 as recently as six weeks ago. TSLA is not even close to earning the $100 million needed to cover annual interest payments generated by their non-convertible notes. So how can they fund all of Musk's grandiose dreams, including gigafactories and mass-market car production?
The simple answer is that they can't. Tesla is not a self-funding entity. Not now, and certainly not in the foreseeable future. The promise of autonomous driving and purely electric power trains may be real, but Tesla's lack of financial power is going to limit the company's ability to fight its larger rivals.
Sell-side auto analysts (I was one for 11 years) like to compare Tesla's market capitalization to that of established auto OEMs such as GM (GM) , Ford (F) , Volkswagen and Toyota (TM) . What they really should be comparing is cash in the balance sheet. Tesla's third-quarter-end store of $3.5 billion of cash is puny compared with the hoards held by the other OEMs, as those giants have been minting cash through eight years of global expansion.
That's Tesla's fatal flaw. Not its incredibly frustrating inability to perform the most basic existential task -- make cars -- or Musk's weird proclamations and poor capital market decisions.
No, Tesla's problem is simply that it is too small. That's why I hated TSLA stock in October and I still hate it in November.