Is a Judge's Request for “Reasonableness” a Win for Elon Musk?

In October, in the wake of a particularly ill-considered "funding secured" tweet regarding the possibility of taking his company private, the CEO of Tesla (TSLA 4.96%), Elon Musk, cut a deal with the Securities and Exchange Commission that cost him some money, a soupçon of unfettered power, and -- perhaps most painful -- the right to be completely unfiltered and unsupervised in his social media postings. Since then, it has become clear that the billionaire remains determined to live on the edge when it comes to the tweeting part of that agreement, and the SEC asked a judge to hold him in contempt. Late last week, the judge essentially told them all to play nice, and figure it out like adults.

In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Andy Cross and Jason Moser consider what that agreement might look like, and discuss how Tesla -- the stock and the company -- will weather the next downturn, whether Musk can (or should) give up "poking the bear," and the automaker's path to profitability.

To catch full episodes of all the Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 5, 2019.

Chris Hill: This week, a federal judge gave Elon Musk and the SEC two weeks to settle the dispute about whether Musk violated the settlement he had agreed to back in October. Judge Alison Nathan told both sides to "take a deep breath and put on their reasonableness pants." I'm unfamiliar with these pants, but I like the approach that the judge is taking here.

Jason Moser: I feel like I'm going to take that home and use it on my kids once or twice in the coming week. Listen, this is such a battleground stock. I really do feel sorry for anyone who is exceptionally over-weight in this company. It's got to be tough to sleep at night if you are. Probably the worst thing about this is that I'm not surprised at all. [laughs] I think that the trouble with being a publicly traded company is that Tesla the business is going to be held to these arbitrary benchmarks on a quarterly basis when it comes to producing cars. What we're finding now, and I'm sure what Elon Musk has known for a while, is that it's very difficult to make and sell cars.

I think the bigger question for Tesla, for me -- I think they've clearly established themselves as a viable competitor in the space. But you look at the business itself, it's anything but simple, the capital structure. I start thinking ahead to when the next recession hits -- we know that's when, not if -- what happens to this stock when that next recession hits? Because I think the space is only going to get more and more difficult now, more and more competitive. From a management perspective, it's probably better if Musk quits poking the bear and just focused on actually running the company. But clearly, he likes stirring up trouble. I don't know that you're going to be able to get away from that.

Andy Cross: Poking the bear, you're talking about the SEC. Let's just talk about the quarter. They delivered 63,000 vehicles. That's down 31% from the fourth quarter, which was a record. The Model 3, which is really what they're banking on being the mass-market vehicle for consumers, deliveries there were down 20%. So, what I'm looking forward to is understanding how the Model 3 will be from a profitability perspective. As they lower that price to drive up demand, will that be profitable enough to continue to drive Tesla toward some kind of profitability that investors are ultimately going to want?

Hill: If you're a shareholder, do you want Elon Musk being reasonable? I don't think he got to where he is at this point in his life by being reasonable.

Moser: I don't think, as a shareholder, I want to have to deal with this narrative regarding the investment. I would rather see him just keep his head down and just keep doing what he does best.

Going back to some of those numbers, it is important to note that while those numbers came in shy for quarter one, there was some pull-forward of demand from quarter one into quarter four of last year because of a step-down in the federal tax credit. And that's important to note, because that goes to that pricing power thing. We've always questioned Tesla's ability to raise prices. Really, there are a lot of incentives involved in getting people to purchase those cars. Talking about profitability, this is not something where they can just raise prices at the drop of a hat.

Cross: That's in the U.S. So much the demand is coming from Europe and China, and they had some struggles there from the operations side. To Jason's point, I think the thing we really want to see with them, and the hope is that Elon Musk will do this, which is drive Tesla from a car manufacturing company, being able to solve these problems so they can get these deliveries set to where they want to be and they can manufacture these companies. Especially when I think about China, which they're investing a ton of money into that Gigafactory over in China.

Moser: Just to reiterate, they did reaffirm in the release prior guidance of 360,000 to 400,000 vehicle deliveries in 2019. They're not backing off of that number yet. Granted, it's still very early on in the year, but it's worth noting.