After the whole "We're ready to go private ... Oh, wait, just kidding!" debacle, Tesla's (NASDAQ:TSLA) one-month stock chart has been a disaster of peaks and valleys. In this week's episode of Industry Focus: Energy, host Michael Douglass and Motley Fool contributor John Rosevear go through a timeline of Tesla's latest events, then tell investors the story behind the headlines. Funding really may have been secured -- privatization could have been canceled for a number of totally non-nefarious reasons.
On the other hand, Model 3 production is apparently lagging the company's goals. (Shocking!) The timing of that info leak is unfortunate and a little strange. Can Tesla pay off its debts when it keeps missing on goals like this? Tune in to hear about these stories and many more.
A full transcript follows the video.
This video was recorded on Aug. 30, 2018.
Michael Douglass: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Thursday, Aug. 30. We're going to talk about Tesla and walk you through the story of the last three and a half weeks. I'm your host, Michael Douglass. I'm joined by John Rosevear. John, great to have you back on the show!
John Rosevear: Thanks for having me, Michael!
Douglass: Fantastic. Before we get into the details and tell this story, I have a quick announcement about the Industry Focus lineup. I am leaving the team to pursue another opportunity at The Motley Fool. This is my last live episode hosting Industry Focus. I've pre-recorded another pair of episodes that will air over the next few weeks as the team identifies how they want to handle things. But don't worry, it's not goodbye for forever. I'll still be around, and I anticipate coming on from time to time to say hi. If you have missed my particular brand of vocalized pauses and my ums, then don't worry, [laughs] you'll still be hearing from me from time to time.
Alright, let's head into the story. On August 7th, Elon Musk tweeted that he had "funding secured" to take Tesla private at $420 per share. In the days that followed, well, the story got a little more complex.
Rosevear: Yeah, it turned out that funding maybe wasn't so secured, or even close. Tesla's board appeared to be taken by surprise. The Saudi Arabian Sovereign Wealth Fund that Musk was counting on to be that secured funding was also taken by surprise. That set off a mad scramble. Musk hired bankers, the board set up a special committee and tried to get some advice, lawyers came in, what appeared to be a crisis management PR team came in. They were all set up to get a formal proposal. There never was a formal proposal. Then, Musk called the whole thing off.
Douglass: Yeah, which was a little confusing, I think, for all of us. When he called it off, he basically said, "Hey, there are some reasons that we're not going to go with this." No. 1: Tesla shareholders think the company is better off remaining public. OK, fair enough. And, it would have been very difficult for smaller shareholders, retail investors, folks like you and me -- although, I don't think either of us is a Tesla shareholder -- to participate in a privately held company. Usually there are fewer liquidity events and things like that. It's not necessarily as easy to take that money that you've invested, hopefully, successfully and that has hopefully made you more money and do something else with that.
Rosevear: There are also limits on how many people who are not big-time investors you can have in a private company before you start to have to make the filings that you would make every quarter if you were a public company. Even though you're a private company, you have to make those if you've got over, I forget, it's over 2,000 shareholders, or over 300 or 500 people who are not accredited investors.
Douglass: Right, some relatively small number of people.
Rosevear: Right. This is seemingly what Musk wanted to get away from -- making these quarterly reports.
Douglass: Of course, as we were talking about beforehand, some institutional shareholders have limits on how much they can invest in a privately held company. Institutional investors tend to be going for larger public companies. So, that would also have complicated things a little bit.
Rosevear: I can speak here as a former Fidelity Investments person, most of the Fidelity funds have limits. You can't put more than 5% or 10% of assets in non-public companies, and you can't hold more than a certain percentage of the companies, and so forth. It becomes this big compliance hassle. They have done some private placements for Fidelity funds that whole shares of SpaceX, for instance. But I think he had some fund managers who maybe hold some of the biggest positions in Tesla telling him, "Hey, I'm going to have to sell some. I can't go in with all of this."
Douglass: Right. Then, of course, as Musk also noted, the process of going private, as you've alluded to, it's a pain. It's not an easy thing. He wants Tesla to remain laser-focused on production of the Model 3 and on becoming profitable. Going private, you can argue it both ways. Perhaps, long-term, it might help the company better focus. At the same time, in the short-term, it would be detrimental to that ability to focus, because it would leave Tesla doing all this compliance stuff and all this hassle and trying to figure out a bunch of different things. That would make a lot more difficult to focus on those goals.
Rosevear: Or, at least, that's what Musk said. [laughs]
Douglass: Sure. Sure.
Rosevear: I mean, I got up Saturday morning early intending to go to the gym, saw all this, and was like, "Oh, no, I have to write an article." One of the things I said in the article is, sometimes with Tesla, the real story is between the lines. Actually, often with Tesla, the real story is between the lines. I started poking around a little bit into what really happened here. There were some signs that maybe they couldn't get enough investors, certainly at $420 a share. The valuation was very, very rich. Very, very rich. Tesla $300 a share, many of us will say that's priced for perfection over the next 15 years. [laughs] You know? And at this premium that he wanted... And at the same time, you have other people saying, "Well, it's really worth $3,000 a share," or whatever. There's this wild discrepancy.
But Charlie Gasparino of Fox Business News, had tweeted out a bunch of reports last Wednesday in the midst of all of this, saying he was hearing from bankers inside the negotiation that they were skeptical they could get $420 a share, or at least enough investors at $420 share, to actually do the deal. That was a potential sticking point. It's possible they came to him and said, "We can do this. We do have more than enough funding to take it private at some lower price, but not enough interest at the price that you've promised people."
Douglass: Yeah. Obviously, that makes it difficult to make the deal happen.
Rosevear: Right! At that point, you're saying, well, maybe I have to back off this. Another possibility, if you spend a lot of time reading, Tesla's stuff on Twitter -- as I unfortunately do. I don't say unfortunately because of those folks I read, it's because it sucks up a lot of time.
Douglass: Time you could spend doing other things. Fair enough.
Rosevear: Yeah. You get the sense sometimes that people think Tesla's hiding something. Tesla's running short on cash, why haven't they just done a follow-on equity offering? Why haven't they done a bond issue? So, there's speculation that, well, maybe the SEC said, "Next time you do that, you'll have to disclose something," and it's not something Tesla wants to disclose. Or whatever. That there's some reason they can't do that. There's other things. Does Tesla really have 420,000 pre-orders for the Model 3? Are they rock-solid, real pre-orders? There are a whole bunch of questions you can raise here, where it seems like Tesla has very artfully worded things to discourage further inquiry.
Maybe that's just how Elon Musk talks about things. But there is a possibility that something's being hidden here. So, you have to say, any big-time investor coming into this is going to do heavy due diligence. They're going to want to really dig into stuff and ask them some tough questions. And if there is something that Tesla fears, if it comes to light, will tank its stock price, that maybe it's possible that once Musk realized the extent of due diligence that people were going to be doing, he said, "I think we have to back away from this."
Douglass: Sure. And to be clear, we're not making any claims about Tesla being untruthful, unforthcoming about things, or anything like that. It's merely a note that the due diligence is a distinct possibility that that was a thing. That once Musk thought about it, he thought it could be a problem.
Rosevear: I'm reporting on what appears to be informed speculation. We don't have any real basis for saying anything like that. This is just a possibility. If there is, in fact, something that Tesla would prefer not to disclose, that it might come up and would, of course, get leaked in this process -- because this process would likely be quite leaky. Even if there are things that are not fraud, but are confidential business details or whatever, they may have been concerned about leaks around that, as well. It just may have been the case that, once Musk really scoped this process, he said, "I don't really want to go through it."
Douglass: Yeah. The confidential business details, especially when you consider how many different companies out there are working on developing electric vehicles and things like that, there's a lot of reason to think that some of that would be potentially useful for competitors, and maybe something Tesla wouldn't want to go into.
We'll head right into the "now what?" Let's turn to the "now what" with Tesla.
Rosevear: Actually, before we go here, I want to say one last thing about what we were talking about before. After the deal was called off, in the reporting over the last few days, The Wall Street Journal came out and said, one of the potential investors was Volkswagen. And it's possible that Musk said, "Jeez, I don't want Volkswagen doing due diligence." [laughs] Talk about competitive issues. Volkswagen, of course, controls Audi and Porsche, who are gunning for Tesla rather furiously in the coming year or two. It's quite possible that he didn't want them anywhere near it. And once he started to realize that some of these investors might be giant global automakers poking through his business, he might not have wanted to go there.
Douglass: Yes. Anyway.
Rosevear: Something to throw you off, Michael!
Douglass: No, no, that's fine! With that in mind, let's turn to the "now what" of this, which is that, as Gasparino has noted, there's certainly some possibility that Tesla might need a recapitalization if privatization plans fail. Basically, Tesla's running low on cash. It's possible that it may be blocked from raising more via equity or debt issues. They've got $2.2 billion cash, but $3 billion accounts payable, $1.8 billion accrued liabilities, really only $231 million remaining on their asset-backed credit line. So, there's reason to think that they're a little bit stretched for cash.
Rosevear: That was as of the end of the second quarter. And after that got played up in the press, suddenly, The Wall Street Journal got some access at Tesla. They disclosed that they've made a $500 million payment on the credit line, which brought down their cash but brought up their available credit on the line. They said they plan to retap that before the end of the quarter. That might have just been about appeasing the lenders. "I made a payment on my credit card, but now I'm going to go use it up." It was exactly that sort of thing.
But what they said is that getting that $500 million back in their cash pile, plus what they anticipate as increased sales in the second half of the third quarter, they expect to end the quarter with more cash than they had at the end of the second quarter. That said, they've got ongoing expenses, they've got other products they want to bring into production -- the Semi, the Model Y SUV that may or may not be based on the Model 3 -- and they've got a big debt repayment coming at the end of February. They owe $920 million on a convertible bond issue.
The clear conclusion is... well, I don't want to say the clear conclusion. Most analysts believe Tesla needs to raise a couple of billion soon-ish.
Douglass: Yeah, and that's a legitimate concern. I'll throw out there, as well, that tapping the equity markets is, of course, always an option. But one of the really key questions there is going to be, well, what happens with production? There have been Tesla leaks to Electrek -- which, as you've noted before, is their favorite outlet -- that they are still not quite making the 5,000 per week Model 3 production timetable. That means that they're on pace to fall short of their production guidance. That might make it a little bit more difficult to raise a lot of money through the equity markets, if investors basically see Tesla failing to deliver on its original goals.
Rosevear: That leak was kind of interesting. It was a piece that ran on the blog Electrek earlier this week. Fred Lambert is the writer there who has some sort of close connection to Tesla. When Tesla wants to say something, often they'll tell Fred, and Fred writes it up, or at least that's how it appears to the rest of us. This felt almost like Tesla was starting to walk back its guidance. That's an interesting thing to be trying to do right now. "OK, we called off the go private, we're going to just go with whatever Plan A was officially." This is what Tesla seems to be telling us. But now, they're easing back and the guidance. We really have to wonder what's going on behind the scenes.
Douglass: All of this combines to paint an interesting picture for Tesla. I think in a lot of ways, the company is in show-not-tell mode. So, I think people are really going to want to be seeing what they will ultimately show. Obviously, a walk-back on guidance would be big, bad news. I'm curious, John, what's your take on Tesla? What should investors be thinking about going forward? What do you think we'll see over the next couple of quarters? Again, all speculation, I recognize, but.
Rosevear: I honestly don't know. I mean, you start to talk about recapitalization. What is that? Is that a placement where we take in cash and exchange for shares priced at a discount, as they did with Tencent last year? Are we talking about a quick package trip to bankruptcy court? [laughs] I mean, the implications here range in their level of direness for investors from, "Yeah, there's some dilution, but we'll write it out, to, boom. [laughs] You know? Bankruptcy is not typically good for equity holders. I don't want to say bankruptcy too loudly, because we're not clear that's where they're going.
Douglass: Yeah, I think there's plenty of reason to think that there are --
Rosevear: But they're at a point where you can see a path from current events to that. Perhaps the probability is not that high, but it's still something that, even if you were bullish on this thing, you've got to start thinking about it a little bit. Tesla's hardcore fans talk about, "Fear, uncertainty, and doubt, the fudsters!" when everybody is skeptical. That's bad. I tweeted yesterday, if you don't have at least a little fear, uncertainty, and doubt right now, you might want to get some. There are some paths from here that look a little worrisome, if you're an investor.
That said, I've said for a long time that there is a profitable market for Tesla here. Tesla can probably hit sustainability somewhere between one and two million vehicles a year, if they can keep things rolling and keep cash in the till and get this Chinese factory they've talked about actually into action over the next couple of years. Sure, they could be this sleek, Silicon Valley alternative to BMW. The path from there to some of the things suggested by its valuation, and some of the things that Musk maybe said a few years ago, about 10 million cars a year, challenging Toyota as the world's largest automaker, that path has never been very clear. But certainly, there is a path to sustainable profitability from here as well, if they can get through this cash squeeze, if they can get their protection act together, if they can bring forth the SUV derivative.
I don't think the Tesla semi is important to the story. Bringing forth the products that generate demand and then making enough high-quality vehicles to satisfy that demand, that's what they need to be doing right now. At that point, once they've got that fixed, then they can revisit the energy story, which seems almost to have been put on the back burner right now -- the solar panels and the power walls and things like that. That does seem to have been ratcheted way down while they figure out, how are we going to make Model 3s enough to get them to every customer who has signed up for one?
Douglass: Right. I'll say, my personal take on it is, that sort of ruthless prioritization makes sense when you're in a spot where your cash position isn't as strong as you'd like it to be, and you are likely looking at ways to raise some more cash. My background is biotech, so dilution is something I guess I could say I'm pretty used to. I'll even say that I've seen plenty of companies in much worse condition than Tesla. By that, what I mean is, they don't have any revenues at all, they're working on a Phase II drug, they have to recapitalize a few times. That almost never goes to bankruptcy. So, I agree with your comment that, listen, yes, it's on the spectrum of possibility, but it's a fairly unlikely possibility right now, as far as we can tell.
But I do think that there's definitely reason to think that Tesla's going to need to do something to recapitalize soon, and that we're really going to need to see them show not tell when it comes to Model 3s in particular in these coming quarters.
Rosevear: There's one other variable too, here. For most Tesla shareholders, this is something they've never had to actively consider. Autos are cyclical. Tesla is going to be just as cyclical. Tesla's gonna be a cyclical automaker like its larger peers. BMW is subject to the cycle. If we have a big economic downturn and demand falls, as it will eventually -- when that happens, nobody knows, but as it will eventually -- depending on where Tesla's cash is, where its new products are, where its factories are, that could be a very troublesome situation, too.
That's out in the future. But it is going to be something that, when it happens, it's going to be, I think, a big surprise for a lot of Tesla's younger retail shareholders who have maybe never really thought about the car business as cyclical because Tesla went public coming out of the last downturn.
Douglass: That's true. I think that's a thing that a lot of people are going to have to deal with in a lot of different companies, just because we've been in a nearly decade-long bull market at this point. At some point, that turns.
Rosevear: Right. It's something that companies like Ford and General Motors are starting to talk about more loudly. They have $20 billion-plus cash reserves intended specifically so that they can roll through the next downturn if their profits get squeezed, and still keep developing the new vehicles. Tesla doesn't have a whole lot of margin right now. When the downturn happens, where are they at, in terms of cash, in terms of new products, in terms of their factories, and so forth? Those will start to be big questions. Those aren't questions now, but those questions are out there. It's something else shareholders should be thinking about, because it's very late in the cycle. This has been going on time.
Douglass: Yeah, absolutely. A lot of question marks for Tesla. I think it's fair to say, John, that's probably one of the many reasons, along with valuation and a few other things, why you and I are both not shareholders as of right now.
With that in mind, of course, there are plenty of arguments to make on behalf of Tesla. If you had to fool.com, you'll find plenty of articles on both sides of the pretty long-running debate. Certainly, John's weighed in a few times, and we've had a number of people who have weighed in with a variety of viewpoints. Check it out. There's a lot of good stuff there.
I think the most important thing that that highlights is how important it is to collect a lot of different viewpoints, talk with a lot of people who think differently from you, to really try to get to the best, nuanced understanding of any company. When people say a company's going to the moon, or that it's going to just fall apart, often there's a lot more nuance to that. There are a lot of different possibilities. Really understanding and weighting that, and thinking about those risks, are really important for understanding how to best invest.
With that in mind, that's it for this week's Energy and Industrials show. Questions or comments, you can always reach us at Industry Focus at fool.com. 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. This show is produced by Austin Morgan. For John Rosevear, I'm Michael Douglass. Thanks for listening and Fool on!