Why Tesla's New Hell Is Better Than the Old Hell

In this segment of MarketFoolery, host Mac Greer and senior analysts Andy Cross and Jim Mueller discuss the latest news items around Tesla (TSLA 4.96%).

In the "hedging your bets" category comes word that Saudi Arabia's sovereign wealth fund -- which holds a $2 billion stake in Tesla -- just invested $1 billion in electric car start-up Lucid Motors.

But really, these days, what gets people's attention about this company remains its CEO, and Elon Musk's tweet that it had transitioned from "production hell" to "delivery logistics hell" is what has investors chattering. But the trio have their eyes on a couple of other challenges for the automaker.

A full transcript follows the video.

This video was recorded on Sept. 11, 2018.

Mac Greer: Let's begin with Tesla. Jim Mueller, a few things going on with this company. We have the news that Saudi Arabia's Sovereign Wealth Fund has invested $1 billion in Tesla rival Lucid Motors. File that away. Now, for what some may consider the slightly better news, we may even term this as progress -- on Sunday, in response to a customer complaint about a delay in delivery, Tesla founder and CEO Elon Musk tweeted that Tesla, "has gone from production hell to delivery logistics hell, but this problem is far more tractable." Jim, sounds like progress.

Jim Mueller: Well, it sounds like a tour through Dante's Nine Circles, doesn't it?

Andy Cross: [laughs] The Tesla story for the last few months.

Mueller: Yeah, right. Production hell, let's start there. Tesla, for a couple of quarters, had Elon Musk saying, "We're going to reach 5,000 Model 3s built each week." They missed it for a couple of quarters. They finally made it at the end of June, just before the second quarter ended. But in August, they said they were going to produce between 50,000-55,000 Model 3s for the third quarter. If you do the math, that's about 4,600 per week. They're not at the full 5,000 for the third quarter. In 2019, they really want to and almost need to produce much more, as many as 10,000 a week, to satisfy all the demand. But they seem to be doing alright there. That's where he says we've been moving on.

The next thing is, OK, you're producing 55,000 cars. How do you get them to the customers? That's the delivery logistics hell that he's talking about. And he's right. That is a more easily solved problem. You get the cars out, it's just a matter of getting the right shipping out and notifying the customers on when to pick up and so on. Musk was responding to this one customer who said he had been told on the 8th and then the 15th and the 20th and 22nd, and now it's delayed, what's going on? He says, basically, "Sorry, but it should not be too much longer."

Then, the third hell that he didn't even mention is, well, what about all the spare parts? I mean, more and more cars out there get into accidents, you have to have repairs. Musk also tweeted over the weekend, I think it was over the weekend, that he wants collision repairs to be done in-house. That means they have to provide somebody, either their own repair group, or your local mechanics, with spare parts. That might be a third hell that has to come through. Musk said that hasn't been a top priority yet.

Greer: Andy, let's put this in perspective, though. Three circles of hell there. But when you look at shares of Tesla, shares of Tesla still up around 78% over the past five years. It's been a rough last year, down around 21%. But this has been an incredible stock.

Cross: Yeah, and driven so much by the vision of Elon Musk. He just embodies all of what he wants to do with Tesla, and he's the largest shareholder. My biggest concern with Tesla just continues to be the funding needs, whether it's repairs in house, continuing to build out new factories, new initiatives, just to be able to get through all of the operational logistics, the funding needed, with the amount of cash the company continues to burn and their balance sheet weakening. Who would want to fund the growth picture for Tesla continues to be a concern of mine, which is why I'm lukewarm on the shares these days.

Mueller: Well, I'm not only lukewarm, I'm actually short just a handful of shares. But that's a short-term investment idea of mine. It's based on the weakening balance sheet, the $2 billion or so they have in cash while they're burning well over $3.5 billion a year. They don't have much more debt that they can pull in from the debt they have available right now. They're going to have to, if they want to keep on spending like they need to grow to 10,000 cars a week, Model 3s, they're going to have to go back to the equity or debt markets. And at that point, I would expect Musk to finally cave in and say, "Yeah, we have to do it."

Cross: Yeah, and one thing we've talked about internally here and talked publicly on our services is the need for Elon Musk to have a really strong second operator and No. 2 in charge. Tesla has lost a few of their key executives over the last year or so. To really get a person in to work with Elon, to help him through all these operational challenges, is a very important point. If you think that he can do that and is willing to do that, then the future for Tesla, in my mind, becomes much brighter. But until that happens, I'm a little not quite as excited with the shares today.

Mueller: In my mind, as well. I've heard that he has an operator at SpaceX. He doesn't have to be on top of everything there. But he doesn't have a similar person like Steve Jobs had with Tim Cook back in the day. H doesn't have a Tim Cook at Tesla, to run the company day to day. And he really needs that. Frankly, his distractions are hurting the company and hurting shareholders.

Greer: And, when you move back from that, I hear you talking about his need for a No. 2, but when you look at Musk, along with his vision, I think it's fair to say a lot of people would say, "The guy behaves kind of erratically. You never quite know what you're getting." So, at what point, with a founder-led business, do you say, "It's time for the founder to relinquish his or her CEO roles and step back from running the business?" Is there a point that you look at it and say, "Musk is no longer the right guy to run this business?"

Cross: Let's not forget, he's still a very young entrepreneur and a young leader. I think he's less than 50 years old. He still has years and years to be able to continue to drive what he originally thought with Tesla, and not to mention what's happening over at SpaceX. I'm willing to give founders who have success with their vision a lot of room to be able to continue to grow the company and take it where they want to go. I just think that they do need operational help to be able to drive that vision. Clearly, over at Facebook with Sheryl Sandberg helping out Mark Zuckerberg, is a great example. As long as he can find that kind of help, the future for Tesla is far brighter than it is right now.

Mueller: Yeah, he doesn't need to step down as CEO. But, as Andy says, if he has a strong operator, that'll do the day to day stuff, then yeah, the company should do well.