Just how screwed is Tesla? You don't have to look at the past few weeks, months, or even years to see that it's a tough—if sometimes exhilarating—ride for Elon Musk's flagship EV operation. The problems didn't start on August 7, when Tesla CEO Musk tweeted a cryptic plan to take his company private at $420 a share. “Funding Secured”: A meme is born. You don't even have to examine his ongoing Britney Spearsian public meltdown—the performative weed-smoking, his imbecilic insertion into the Thai cave rescue, complete with pedophilia accusations, or his unabating bullshitting over production numbers for his product.
Closer to the core issue are his self-inflicted legal entanglements with the Securities and Exchange Commission, which evidently began with his "funding secured" tweet—sent, some presume, in the twilight state of poorly medicated insomnia—and were exacerbated by Musk's unnecessary antagonism of the SECafter his lawyers had reached a reasonable settlement.
But it's not even legal problems that are going to push Tesla (and, let's be honest, Musk) over the precipice. The problem is pure and simple: they have no money. In fact, they have a massive pile of growing debt, and the lenders are going to want that money back.
Recently, hedge fund manager (and Musk antagonist) David Einhorn of Greenlight Capital wrote to his investors that Tesla right now bears a grim resemblance to Lehman Brothers before its 2008 bankruptcy (a collapse that Einhorn predicted months earlier, and that helped tilt the planet into a catastrophic all-hands “correction”). For Tesla, as for Lehman Bros., a mixture of emboldened deception, arrogance, and desperation have turned the Muskman into a monster.
“There are many parallels to TSLA,” Einhorn wrote to his investors. “In 2013, TSLA was on the brink of failure as customers who had paid deposits weren’t taking delivery of the Model S. TSLA’s cash reserves fell to a dangerously low level and CEO Elon Musk secretly and desperately tried to sell the company to Google. Rather than communicating truth to shareholders, Mr. Musk bluffed his way through the crisis. There were no regulatory, legal or market consequences for failing to own up to reality. The business survived, and Mr. Musk was celebrated for his successful bluffing.”
What else is bumming out the Muskman right now? Let's see:
- Even though a judge approved the SEC’s settlement over the "funding secured" tweet, Tesla’s still in some legal soup. A Department of Justice investigation into Musk's claim is ongoing, and the SEC is still sniffing around other issues.
- Potential workplace violations from local and state governments dogging Tesla, as well as potential tax credit violations.
- Evidently (and unsurprisingly), the GOP is likely going to end the EV credit regime that has been vital to growing the electric car marketplace (and to subsidizing Tesla's already high ticket price).
- He and Grimes unfollowed each other on Instagram.
Crucially, the SEC is drilling down on Tesla’s (and Musk’s) claims of production numbers and profitability—claims that are self-reported and that have a direct impact on the long-term health of the company and the stability of its stock.
If you’re to take the cynical view of Musk’s prickly, obfuscating public demeanor, he shares Donald Trump’s worst traits: Keep on bullshitting, and if the bullshitting isn’t working, bullshit more. Eventually, people will believe the bullshit. The big difference between Musk and Trump, though, is that while Trump will likely never be held accountable for this lies-upon-lies tactics, Musk—and Tesla—eventually will.
While people can debate the build quality of Tesla's cars, or quibble over whether the companty's sales volume is 25,000 units a quarter or twice that or half that, the truth is that unless some sort of multi-billion dollar miracle appears before mid-2019, Tesla will have no choice but to file for bankruptcy protection.
The facts: Tesla is carrying $10.1 billion in debt, and Musk has to return to the capital markets by the first half of 2019 to refinance at least a portion of that. This has created excruciating pressure on the company to start turning a profit to help entice prospective financiers.
Around $230 million of that debt—in the form of a convertible bond—is due in November. That's days away. And that payment wouldn't ease the pressure. In fact, it underlines the importance of Tesla's stated goal of turning a profit in this, the 15th year of Tesla's existence. The company had a net-debt position of $9.2 billion at the end of the second quarter of 2018, rising from $8 billion at the end of the first quarter and $4.8 billion at the close of second-quarter 2017, according to investment firm Goldman Sachs. It also a $960 million bullet payment due in March.
These aren't good trends.
Especially since Tesla, which has a market cap of around $45 billion, has left a trail of broken financial promises. On April 13, Musk tweeted an insult at The Economist for (correctly) questioning the ability of Tesla to meet its financial goals.
Even if the sales of the Model 3 lead to a cash flow positive state in Q3 and/or Q4, what happens in Q1 2019, when sales of the new "affordable" car begin to naturally tail off? The state of the company is no less precarious just because it's now only a catastrophe and not a massive catastrophe.
Musk is a genius. Few people would dispute that. Since becoming Chairman of the board of Tesla in 2004, he has achieved one of the most difficult things in business: He took a product with promise, and crafted that product into a modern-day myth. When you think of an electric car, you think of the Tesla—just like an iPhone will be the symbol for the cell phone long after we’re gone. He has millions of followers, and just as many antagonists. He is unrestrained, loutish, and sly. Rolling Stone anointed him the Jim Morrison of Silicon Valley. Think of the stresses of his work day: he juggles a company with a market cap of $45 billion, a feud with the SEC, a demanding rock-star girlfriend, angry Cardi B tweets, a swarm of stock shorts, production and distribution problems with the Model 3 that sometimes lead him to tweet angrily at individual customers.
But despite all the noise and all the inspiration, Musk is lacking in the fundamentals. Mass-producing cars is hard stuff. But Musk didn't make it any easier on him by essentially ignoring the hard lessons that established automakers spent a century learning. One can only hope that once SpaceX starts sending humans up on its rockets, he applies the lessons NASA learned with the Apollo 1, Challenger, and Columbia disasters. Arrogance and space travel are a toxic mixture.
I'm pretty sure Musk is smart enough to know the future of his company is cloudy at best. I'm also pretty sure he'd like to not be sitting atop the Tesla cookie when it finally crumbles. All of the madness and public freak-out we're witnessing is either for real—the pressure of keeping all these very fragile plates spinning, is actually getting to him—or he's trying to force the board to fire him. To borrow from Francis Ford Coppola, if every man has got a breaking point, then I believe that Musk has reached his. The man needs a vacation.
So what happens to Tesla after it declares bankruptcy in 2019? It's anyone's guess, but my money is on either Volkswagen or Apple buying it up for pennies on the dollar. Because they most certainly have secured the funding.
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