It's a day ending in Y, which means more Tesla (NASDAQ:TSLA) news! At least this time, it's not from CEO Elon Musk's social media accounts. The Wall Street Journal recently reported that 18 of Tesla's 22 suppliers now see the scrappy car manufacturer as a financial risk to their company.
In this segment from MarketFoolery, host Chris Hill and analyst Tim Hanson explain the report, what it means for Tesla, and why so many of these companies are worried about the automaker's ability to pay up for their services.
So much of Tesla's value is tied up in its story. How much does a report like this tarnish that tale? Tune in and find out more.
A full transcript follows the video.
This video was recorded on Aug. 21, 2018.
Chris Hill: Shares of Tesla are down 16% since earlier this month, when Elon Musk published his tweet about going private, #fundingsecured. The latest wrinkle in what is really the best drama on Wall Street is this survey The Wall Street Journal reported on of 22 auto parts suppliers. Of the 22, 18 of them believe that Tesla is now a financial risk to their business. They basically think, either they're not going to get paid, or their payments are going to be delayed. Tell me what I should think about this. Part of me looks at this and says, "Well, this is, in some ways, a very niche version of the Consumer Sentiment Survey that comes out every month."
Tim Hanson: Yeah, I think there are only 23 respondents, statistical significance.
Hill: And it's like, how are you feeling? That to me is less concrete than actual results. But by the same token, it's just not a good look. This is one more thing that just goes to not great optics for Tesla.
Hanson: Yeah. I think the business owners surveyed are absolutely right to consider Tesla a financial risk. Most of them are relatively smaller companies, for example. What's interesting, there are two sides to this coin. Looking back historically at Tesla's accounts payable numbers, their days payable outstanding and the percentage of their payables relative to the size of their balance sheet really hasn't actually gotten bigger. They're pretty much paying today on the same terms they were paying five or six or seven years ago. And presumably, the suppliers are the same people. What's different is that the scale of those payables has exploded from $400 million back in 2014 to now, it's well over $3 billion in payables. So, for these relatively smaller businesses, you would expect that the account payable from Tesla, even if they're being paid on substantially the same timeframe, it's now a really big account. Working capital is the lifeblood of a business like that, and Tesla is ostensibly borrowing more and more money from them. Obviously, that would be a concern for them.
The other reason why they should be concerned is, previously, four years ago, Tesla had substantially positive networking capital. Today, their networking capital is negative $2.4 billion. That means there's a $2.4 billion deficit between what they have liquid and what they don't need to pay liquid. Where's that money going to come from? Some of it is current debt. Elon Musk is kind of a magic man with his balance sheet. Maybe he can extend it, he can do something. But even if you net that out, they're still negative $300 million their networking capital. So, if you're a supplier, yeah, you should be concerned.
Now, they probably want to have a long-term relationship with Tesla, so you might not expect them to get aggressive. But it's certainly a stealth liability -- well, not a stealth liability, we're talking about it.
Hill: [laughs] Right.
Hanson: It's a big liability on their balance sheet!
Hill: I was going to say, The Wall Street Journal reported about it, I don't think it's stealth anymore.
Hanson: And one of the reasons for that is this other line item, of accrued expenses, is building up on their balance sheet. Some of that is associated with the warranties and repurchase guarantees they have with cars that are out in the world right now. If you believe some of the reports that bumpers are falling off in the rain, and so on and so forth, those liabilities could ultimately eat up the company, as well.
It's an interesting story. There are two sides to the coin. Tesla's saying, "We're not substantially different from what we were a couple of years ago," that's true, but they're also bigger and there's some other things sneaking up on the balance sheet.
Hill: Well, and that's the thing. We talk at various points about different businesses that have a great story attached to them. This is one of them. Tesla has always been, among other things, a really great story. That's why I think this survey is slightly damaging. It's one more thing that Elon Musk and his management team have to respond to, as opposed to focusing on the job at hand.
Hanson: Well, and the other thing to remember is, a great business needs to create a great ecosystem. You have to not only be great with your product and your employees, you have to be great with your customers, you have to be great with your suppliers.
Hill: All stakeholders.
Hanson: You talk to James Sinegal, what's the great story where, he went proactively to a supplier and said, "We're squeezing you too hard. I'm going to pay you more."
Hill: [laughs] "We've run the numbers."
Hanson: "There's no way you're making money on our account."
Hill: "And we've figured out that you're going to go out of business if we keep these terms, so let's get some more favorable terms for you."
Hanson: Exactly. And you have to build that ecosystem, because that's the only way you achieve sustainable success. Now, if he puts a bunch of his suppliers out of business inadvertently, but saves Tesla, I mean, that maybe is just a stay rather than a sustainable solution. We'll see. There's a relatively well-known, but maybe obscure in the general population, balance sheet metric called the Altman Z-score. It measures different balance sheet requirements, and if you're below 1.8 for a period of time, Professor Altman predicts you'll be bankrupt within two years. I think Tesla now is at 1.1, and they've been there for a while. We'll see what happens!
Hill: I love that story about Jim Sinegal because it's a wonderful counterbalance to another story about Sinegal, which is when he was on the phone with Howard Schultz from Starbucks. I think Schultz was looking for better terms for Starbucks to supply to Costco, and Sinegal said something along the lines of, "I'm sorry to lose your business. If you excuse me, I need to call the person who runs Dunkin' Donuts to talk to them about their coffee." [laughs] And you know what? Howard Schultz worked it out. Good for him!