can you please summrize the prolmes in short paragraphplease?
Is it too late for Tesla?
What may have started as an ill-advised bit of summer whimsy —Elon Musk’s tweet on Aug. 7 suggesting that, as Tesla’s chiefexecutive officer and its largest shareholder, he was going to takethe company private and had the “funding secured” to do so — hasturned into a full-blown crisis.
There’s the unwanted scrutiny: Thanks to Mr. Musk’s tweet, Teslais the target of a criminal investigation by the Justice Departmentand a civil investigation by the Securities and ExchangeCommission. There’s the missed opportunity: a Saudi investment fundthat had been eyeing Teslahas invested $1 billion in a rival.There’s the brain drain: the sudden departures of Tesla’s chiefaccounting officer and its head of human resources. There’s theloss of investor confidence: Tesla’s stock price is down 25 percentsince August.
And then there is Tesla’s biggest and most acute problem: itsprecarious finances. Mr. Musk promises investors that Tesla isgoing to start making more cars and profits any day now, but that’swishful thinking. Tesla is not generating enough cash to pay backthe mountain of debt that is coming due soon. Once stalwartinvestors are losing faith in Mr. Musk and his company, and WallStreet is turning on him. Tesla could soon become a case study ofwhat can happen when an iconoclastic Silicon Valley entrepreneur,seduced by his own wonderfulness, thinks the rules of themarketplace do not apply to him.
Tesla’s finances are fragile. It has around $11 billion inlong-term debt and no profits. “That is not a sustainable businessmodel,” Jim Collins, a longtime auto industry research analyst,wrote in Forbes in April. “Not even close.”
From January to June of this year, Tesla generated revenues of$7.4 billion, but it had an operating loss of $1.7 billion, burningthrough its cash on hand. It has $2.2 billion left, most of whichwill be needed to cover operating losses. Romit Shah, a researchanalyst at Nomura Instinet and once one of Tesla’s biggestboosters, reversed course last week, calling the company “no longerinvestable.”
About $1.7 billion of the company’s long-term “convertible” debtis due in the next 14 months, meaning that the debt holders havethe option of being repaid either in stock, at a specified price,or in cash. One chunk of the convertible debt, $230 million, is duein November. The conversion price is around $560 per share. IfTesla’s stock is not trading at more than $560 per share by then,the holders of those notes will most likely want cash. That putsenormous pressure on Tesla and its leader to get the stock price upquickly — it’s trading around $300 per share these days.
Not surprisingly, bond investors have become increasinglyskittish about Tesla. In March, the bond-rating company Moody’smoved Tesla’s corporate debt rating lower on its noninvestmentgrade, or “junk,” scale.
In its explanation of the downgrade, Moody’s acknowledged thatthe market continues to admire Tesla’s cars: Advance purchasereservations and deposits for them “remain high.” But that hasn’tbeen enough to solve Tesla’s fundamental financial reality: Itisn’t producing cars fast enough to meet demand, its operations arerunning at a loss, and it has huge debts coming due. The resultingpressure on the company’s cash balance cannot simply be wishedaway.
Wall Street is a confidence game. When confidence in a company,or an entrepreneur, is high, it seems as if nothing can go wrongand there’s no limit to the capital that investors will throwaround. Wall Street fell in love with Tesla and, so far, there hasalways been plenty of money for Mr. Musk and his electric carcompany, then for his space company and then for his tunnel-boringcompany. He was even able to push through Tesla’s $2 billionacquisition of SolarCity, even though many shareholders were waryof buying a debt-laden company owned by Mr. Musk and hiscousins.
To be sure, Tesla is no Theranos; its products are real. Thecompany still has a market value of about $50 billion.
So Tesla’s best option to solve its short-term liquidityproblems is to issue more shares of its wildly overpriced stock.There is already speculation that Tesla will have no choice but toraise new equity — one analyst put the need at $2.5 billion — butonly at a significant discount to the current trading price.Selling stock, even at a discount, will require Mr. Musk to findinvestors willing to buy into his dreams. If that fails, and Teslacan’t repay its debt, Mr. Musk may well lose his company to hiscreditors.
Mr. Musk has always found people willing to take a chance onhim. But Wall Street’s confidence can prove ephemeral, and Mr.Musk’s personal antics are testing the limits of investorinfatuation. He is on the verge of becoming a cautionary tale abouta Silicon Valley genius felled by hubris.
