When part one of my Tesla (TSLA) column was published yesterday at 10:00 am on Real Money, TSLA shares were trading at about $255. As I posted that column to my social media following, I was thinking to myself "is Wall Street in denial?" Well, in the hours that followed the Street seemingly woke up to the disaster that was Tesla's 1Q earnings conference call and the shares slid in the afternoon, finishing the day's trading at $247.63, their lowest close since March 2017. OK, so people are paying attention to fundamentals, and that is reassuring in a market that has catapulted to the Nasdaq to repeated all-time highs this week.
Tesla's market valuation - still about $44 billion after this disastrous week - has always been extremely optimistic, in my opinion. Positive cash flows have largely been reserved for Tesla's third quarter reports, when the company books revenues for tax credits that it sells to other OEMs. In between earnings reports there has always been the cult of Musk on which to fall back. That's what changed between 5:15 pm Wednesday and 5:15 pm Thursday as I am penning this column.
I just don't think Wall Street believes in Elon Musk any more. Note that I did not write "believes Elon Musk" because, let's face it, the guy is a frequent exaggerator, and that has always been part of his charm. Nobody believed him when he talked of Model 3 production figures, profitability deadlines, etc., because Tesla has missed nearly every forecast Musk has given since the company's IPO in 2010. In fact, that perfect record of imperfection is likely going to be Musk's saving grace from contempt charges from the SEC. It was just Elon being Elon; he likes his Twitter (TWTR) , that's for sure, and he is an idea guy not an execution guy.
Taking his proclamations with a grain of salt is one thing; completely ignoring them is another. That's the real downside for Tesla and its shares here. Without cash flow there is no support level - not $250, obviously, but not even $200 or $150 - for TSLA shares from a fundamental perspective. Without the backing of Tesla's sell-side analysts there is no support for the company, not just the stock, and that will make it much more difficult for Musk to raise capital, an idea he grudgingly admitted during Wednesday's call "has some merit."
The seeds of Tesla's Thursday share plunge were sown Monday during the company's Investor Day. It was actually a bigger disaster than the conference call, in my opinion. Analysts ripped Musk's "1 million Tesla robotaxis on the road in 2020" idea in a rare public rebuke of his genius. In my private conversations with some of those same analysts, a more humorous - and completely dismissive - tone emerged. Very influential people are laughing at Musk now. I had never heard the world "dumb" used in regards to Tesla - and Elon is demonstrably not a dumb guy - but I have heard that word used repeatedly this week by dedicated observers of Tesla in regards to the robotaxi idea. It is those same people - and their banks - that would have to lead a potential capital raise for Tesla.
As I have often written about Tesla, cash flow never lies. That said, Tesla's massive cash outflow - more than $900 million - in the first quarter was also accompanied by a massive decrease in development spending. Again that has to be scary to the bulls. Everyone knew Musk was running Tesla on a shoestring, but to see development spending (capex for auto and solar plus R&D spending) of only $660 million in first quarter of 2019 - a 40% decline from the $1.095 billion Tesla spent on development in 1Q2018 - was truly shocking.
Tesla's not spending enough to sustain its growth trajectory and Tesla's not generating enough cash to sustain its existence as an auto company. What's left? A stock that is trading at over 200x my EPS estimate for 2019 (aggressive accounting and a wild comeback in 2H2019 could get them to $1.00 in EPS this year) even as it sits at a 25-month low. There is so much downside here as major institutions - professional money managers, not Tesla owners/fanboys - exit the stock. I believe TSLA shares will see $199 before they see $301 again.