What on Earth Is Tesla Doing?

Tesla (TSLA -1.92%) reported yet another problem with the Model 3 production, and the stock is up on Musk's assurances that this will lead to even more production later. In this episode of MarketFoolery, host Chris Hill talks with investor at large Tim Hanson about the increasingly uncertain future for Tesla.

Institutional investors have been selling shares of the company, and questions of funding options become more and more pressing with every new setback. Also, the hosts explain why there tend to be so few big bank recommendations in The Motley Fool universe, and how investors can get some exposure without too much risk. Tune in to find out more.

A full transcript follows the video.

This video was recorded on April 19, 2018.

Chris Hill: It's Thursday, April 19th. Welcome to MarketFoolery! I'm Chris Hill. Joining, me in studio, investor at large, Tim Hanson. Thanks for being here!

Tim Hanson: Always a pleasure!

Hill: We're actually taping this on a Wednesday, because on Thursday morning, Dan Boyd and I are heading into Washington D.C., so I can interview Jim Miller. So, that'll be on Motley Fool Money.

Hanson: That's exciting!

Hill: Very exciting, very much looking forward to it.

Hanson: Dan loves to get out of the office. [laughs] 

Hill: [laughs] Don't we all from time to time? Who among us, either here at Fool global headquarters or anywhere in the world, doesn't enjoy getting out of the office?

Hanson: Are you guys going to get burgers anywhere?

Hill: I don't know. We haven't talked about possibly lunch. You know what, we're going to have to postpone this taping right now, because Dan and I have to work on where to go for lunch.

So, we're at the front end of earnings season, and I'm curious what you're watching this earnings season, but there are a couple things that have come up recently that I wanted to get your take on. The first one is Tesla, because for the second time in three months, Tesla halted production of the Model 3. I can't think of any CEO working today who works the spin better or more consistently than Elon Musk.

Hanson: He's pretty good.

Hill: Somehow, he's turning this into a positive, this is why we're doing it, this halt in production is --

Hanson: The best thing that ever happened to the company.

Hill: -- going to enable us to ramp up production. And just to put some numbers around it, the production goals for the Model 3 last quarter were 2,500 per week by the end of the quarter. And by the end of the quarter, they were doing around 2,000, so they missed. Came in light, not insanely light, but came in light. So, from that point, now he's saying, this is going to enable us to get to 6,000 per week by the end of June. And I ...

Hanson: You're skeptical. You look skeptical.

Hill: ... am skeptical.

Hanson: Yeah, I'm skeptical too. Disclosure, I've disclosed this on this program before, I have Tesla puts. But the stock is up today on the news that, by shutting it down, it's going to triple production. And the reason they're going for 6,000 instead of 5,000, which rhymes with that old Spinal Tap gag, this amp goes to 11, why didn't you make 10 one louder?

Hill: No, this goes to 11.

Hanson: This gives them a "margin of error." So, in case people in the supply chain can't hold up their end of the bargain, in case they can't hire enough people to staff the factory 24/7, they have margin of error, so 5,000 is going to make it. But, you know what? I guess I would say, put up or shut up, the record speaks for itself with regards to over-promising and under-delivering, so we'll see.

Hill: Recently, we've seen some large institutional investors sell part of their shares of Facebook in the wake of everything that's going on with Facebook and the data breach, etc. I look at Tesla's stock price and I wonder, at what point -- forget individual investors and anyone's own opinion of what the near-term future of this company, and therefore this stock, is. At some point, don't some of the institutions on Wall Street say, "You know what? We're not doing this anymore."

Hanson: That's a good question. It's a really good question. If you look at the shareholder data, aside from T. Rowe Price, the largest institutional shareholders have been net sellers of Tesla stock. And the reason that's interesting is because, obviously, Tesla has a very rabid retail shareholder base, quite an enthusiastic insider shareholder base led by Musk himself, and then you have some big institutions, and there's index funds, too. 

Tesla, by all accounts except for Elon Musk, needs more money this year. And they have a couple of options with regards to how they want to do that. They can obviously borrow more money, debt. Convertible debt is what they've been doing recently. I think their most recent was a straight debt issuance. But, if you look at their capital situation in a rising interest rate environment, I don't think they're going to get a very favorable rate. And obviously, if they have a lot of debt at a high rate, it makes it that much harder to be profitable. Depending on where their stock price starts stabilizing, they may miss the strike price of some of the convertible debt, which means they're going to have more money they're going to have to pay back, which means it's unlikely someone is going to want to do a convertible debt deal with them in the future. 

Which leaves the option of doing another secondary offering of common stock into the market. Now, if you have to raise $1-2 billion of cash through stock, you probably can't sell it all to retail investors. Now, obviously, Elon Musk has been able to brush aside a lot of things that looked kind of fishy, but it would look kind of fishy if Musk bought it all and popped up his own company again. Which means you have to sell it to institutions, but institutions have been net sellers. Who are you going to sell that stock to? And what are the terms they're going to offer, what price are you going to have to put on it in order to raise the money? 

So, I think that's the big outstanding question facing Tesla and its shareholders over the next three to six months, and ultimately that's probably going to be the variable that decides whether or not my puts make money or not, is do they have to raise more money, and if so, what are the terms, and are they favorable or not?

Hill: I want to get your take on another industry altogether. It's one that we don't really talk about all that often.

Hanson: Are we done with Tesla?

Hill: We're done with Tesla, unless you have more.

Hanson: Musk did send a very, very enjoyable letter out to his employees, an email that has now been released online. Which included, among other things, ways to be more productive. My favorite, which I am adopting, so if I get up and walk out of here, you'll know why -- as soon as you think you've stopped adding value in a meeting, he wants you to just get up and leave. Which, as much of a hard time as I give Elon Musk sometimes, I like that. [laughs] 

Hill: That's a good one.

Hanson: I think Dan just left the room, by the way. Oh, burn! [laughs] 

Hill: Years ago, I knew a guy who did radio here in the D.C. area, and when he negotiated a new contract with the station, he hated meetings so much that one of the things he had written into the contract was that any meeting he was required to go to had to be done standing up. He just thought, I'm happy to go to this meeting, but everyone in the room needs to be standing. And his belief, and he was probably right, was that if the meeting had everyone standing, it was going to be a lot more efficient.

I thought you were going to mention the tweet that Musk had sent out directed at The Economist, because The Economist made a point along the same lines of you, regarding the raising of money, and he very directly took them to task, including calling The Economist boring, which, he may be right on that one, but, anyways. He was basically saying, "We're not raising money this year. We don't need to raise money, we're not going to raise money." And to me, that's one of those, boy, I really hope you're right on that one, because from a communication standpoint, I feel like it's easier to massage "misses on production goals" than it is something as black and white as that.

Hanson: Yeah. Literally last Friday -- last Friday -- he was on CBS This Morning giving the first-ever public media tour of the factory. And CBS reported that he said, "We've got all the kinks worked out, it's all systems go from here." Not 48 hours later, they'd shut down the production line.

Hill: Well, come on, they may have filmed that as much as a week prior. 

Hanson: [laughs] I mean, there was a Wall Street Journal article about how all these auto dealers, guys who run auto dealerships, who were just kvetching about Musk's ability to live in an alternate reality where he's able to advertise cars at prices that don't exist. They were saying, "If we did that, the Better Business Bureau would be all over us." [laughs] 

Hill: [laughs] "People would be coming after us with torches and pitchforks." Let's move on to the banks. This was something that came up, one of our analysts and I were talking about this recently, how we don't really talk about big banks on this show, on Motley Fool Money. It's not really something we do a lot of coverage of across our universe. I was looking at The Fool 100 index earlier today and saw that within the index, somewhere just south of 8% is financials. And my assumption is that within the financials, I'm just going to throw a few names out there that are probably there, that's the Visas and MasterCards and PayPals of the world.

Hanson: Those are actually classified technology companies. Your financials in The Fool 100 are going to be Berkshire Hathaway, which is a big one, and then we have a couple of other niche insurers like Markel and things like that. No, not a lot of banks.

Hill: It's not like teenage apparel, which is an industry that just looks so terrible, so filled with landlines for investors. If you bought a basket of big bank stocks five years ago, you're probably pretty happy with how you've done.

Hanson: Your analysis is an interesting one, because the thing that scares people about big banks is that they are so hard to understand and fraught with landlines for investors. If you think about, conceptually, the business model of a bank, you take in deposits from people, and the deposits that you get are zero risk to the people giving you the money. They're backed by the FDIC, of course, to some extent, but the bank, too, is pretty much on the hook for giving everybody their money back. And then, the bank turns around, leverages those deposits, and then makes loans for riskier stuff. If it's Silicon Valley Bank, it might be real estate tied to start-up companies. If it's residential mortgages, commercial real estate, construction loans, these are things that are not sure things. There's obviously a mismatch between the credit worthiness of the deposits and the loans going out. The joke there is that you make it up in volume. You're expecting to lose something, but you don't lend everything out. And you get paid interest on the other side, too. 

But, it's a business model that's inherently risky. And I think over the last five years, you've had a very benign environment with regards to interest rates and recovering economy, that's meant that default rates on loans have been probably lower than they would be in a normal environment. To see what happens when banks blow up, there's a nice, call it every 10 or 15 years, you get some sort of mini financial crisis of some sort, whether it's savings and loans, the Great Financial Crisis, housing, the internet bubble bursting, so on and so forth. And what's terrifying about that from a big banks side, and that's why I tend to traffic my own investing in smaller community banks --

Hill: Tiny banks.

Hanson: Tiny banks, where things are a little more straightforward, if you were to look at Wells Fargo's balance sheet or Bank of America's or any of them, you would see very nebulous categories of assets on their balance sheet. I think Wells Fargo, I'm just going to ballpark these numbers because I don't have them all off the top of my head, it has tens and tens of billions of dollars classified as Other.

Hill: [laughs] Would that we all have tens of billions of dollars' worth of Other.

Hanson: [laughs] Other! What is that? I don't know! Nobody knows! So, how are all these things tied together? How much exposure do you have? Maybe Wells isn't directly exposed to the energy industry, but maybe they're lending to people who are exposed to the energy industry, and so on and so forth. You don't necessarily know how all those assets and liabilities flow through in the real world. And that unknown is what makes investing in big banks really hard. 

But, you alluded to a very good way of playing it, particularly in a low interest rate environment where you can expect interest rates to rise, and for a bank like Bank of America, which has an incredible deposit franchise, to do pretty well -- which is, buy a basket of them, and if the whole economy turns like it did in '08-'09, you're going to lose money no matter what you did. But, don't necessarily take the risk of any individual name, because knowing what specific exposures they have, given the current regulatory regime, is hard.

Hill: You can follow MarketFoolery on Twitter. You can follow all of us on Twitter. Tim Hanson's on Twitter. Dan Boyd is on Twitter. I'm on Twitter.

Hanson: Heck yeah! Dan will berate you if you catch him at the wrong time.

Hill: [laughs] At least I enjoy following Dan Boyd on Twitter, but I will say this --

Hanson: I learned so much when Dan Boyd went to the -- Dan, was it a gaming convention with the figurines? He's not looking. He checked out, he walked out. That was awesome!

Hill: Yes, as did I. I was going to say, depending on how the Washington Nationals baseball team is doing, that informs some of Dan's tweeting. You can follow us, this show, @MarketFoolery. I just want to give a quick shout-out to Julia Robison of Cheyenne, Wyoming, who tweeted a fantastic photo of her four-week-old son, and she wrote that her boy finds MarketFoolery -- and these are her words, not ours -- "absolutely hypnotic." So, I don't know who our oldest listener is --

Hanson: We have a new youngest.

Hill: I think we have the youngest of the dozens.

Hanson: Nice. Hypnotic.

Hill: Hypnotic. What is one thing you're watching this earnings season? It can be something you're curious about, it can be an industry, a company, maybe it's the Tesla conference call. I'm just curious what you're looking forward to.

Hanson: I'm all in on the Tesla stuff. That could be a Netflix series at this point. Then, beyond that, I would say, just to see how the market continues to react. Market expectations continue to be really high, but somehow stocks continue to plow right through them. The Netflix earnings this week were remarkable. I mean, Netflix is obviously doing well in some respects, but that stock has gone bonkers.

Hill: I think that's one of the things I'm going to have to ask Jim Miller, is, as Netflix's market cap continues to creep up toward Disney's --

Hanson: I think it's past it. I think it's surpassed it.

Hill: Is it past it by now?

Hanson: I think so. This week, yeah.

Hill: I wonder how that's going over in Bob Iger's office.

Hanson: It's wild, right? How much longer can stuff just go up? There was a little bit of a blip in the first quarter, the S&P finished down 1% or something like that. But it just continues to roll.

Hill: We shall see. Thanks for being here!

Hanson: Thank you, man!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!