For Tesla, the Clock Is Ticking

Shares of electric-car leader Tesla (TSLA 3.43%) slumped Thursday after it reported a bigger-than-expected loss for the second quarter, and a slight miss on revenue targets. But when it comes to this company, there's a lot to unpack -- not just the numbers, but the choices that led to them.

In this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Jim Mueller (mostly) set aside any questions of how one might feel about CEO Elon Musk or the electric car future and dig into the what these latest numbers show about how Tesla as a business is operating. Are its free cash flow numbers being supported by unsustainable management choices? Did they cut Model 3 pricing too far, too fast? And how will they build the capacity for the next big launch, the Model Y?

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 July 25, 2019.

Chris Hill: Shares of Tesla are down 13% this morning after Tesla's second quarter loss was bigger than expected. Their revenue was also a little bit light. This has long been one of those businesses that you feel like, if the revenue number was higher, maybe the stock isn't dropping the way it is. But there just seemed like a lot of challenges on a lot of fronts. As has been the case for a couple of years now with Tesla, the clock is ticking.

Jim Mueller: Definitely ticking. I'll say upfront, I'm actually short Tesla the company via options. I'm not short because I hate Tesla or I hate Musk and I want them to fail and I'm cheering all their troubles. No. I think the company is fundamentally in trouble. For example, they were ballyhoo-ing the $614 million of free cash flow they generated this quarter. But where did that free cash flow come from? Well, they spent capex, capital expenditures, investments in equipment in such, less than half of what they depreciated. They're not even spending enough to maintain what they have. And they drew down inventory by some $450 million. That's also not sustainable. It's not what a growing company needs to do. They need to invest not only to maintain the equipment, but to buy more equipment to keep on growing. And if you're not doing that, you're not going to be a growing company.

In addition, they lowered the price of their Model 3s, which is supposed to be the car that is going to drive them forward, pun intended. But the question is, have they lowered it too much? Have they lowered the cost of making those things at the same rate percentage-wise as they've lowered the selling price? Probably not, because the margin's gone down. Once you lower the price, it's really hard to raise it back up. Are you selling cars for less than they cost to make? If you are, that's totally not sustainable.

Hill: Thank you for going into that level of depth because I think it's important that, look, name me a CEO out there who's more of a hot button leader than Elon Musk. I don't think there's anyone else out there who people have strong opinions about. When you essentially back Musk out of the equation -- and we'll get back to him in a second -- and just look at, where is the money going with this business? Put aside whatever you think about Elon Musk and look at, what are they doing in terms of spending money? What direction are their margins going in? All that sort of thing. And you pull back from that, and you just see a lot of things that you don't want to see. I forget which analyst said it -- there were a bunch of analyst notes that came out this morning. I'm paraphrasing here. I think it might have been Morgan Stanley. But it was essentially, "There's just not a lot to like in this quarter," referring to a lot of the things that you just referred to.

Mueller: Right. They want to launch the Model Y, which is the next generation of their car. But that requires production spending ahead of the actual building of the cars, because they have to get the plant build the Y. If the Model 3 is using up all their capacity already, and it is, where they're going to build the Y? If you lower your capital expenditure spending, you're not building plant to build this new Y. Then how can you rely upon the Y coming in and helping the company grow further? Yeah, there's a lot of questions aside from management and aside from electric cars saving the world and everything else. Aside from all that emotional stuff, just looking at the numbers raises a lot of questions.

Hill: And yet, and we'll wrap up with this, because it's Elon Musk leading the company, and his ability in the past to raise money, to pull a rabbit out of a hat, that sort of thing, this is why I wouldn't short the stock. That's just me. You're a more experienced investor than I am.

Mueller: [laughs] Well, maybe I'm a stupider investor than you.

Hill: [laughs] No, you're a better investor than I am, and you're certainly more experienced with options. But it is going to be interesting to see. As I said, the clock is ticking. I think in the next three months, one thing to watch is what conversation is there, if any, about raising money? Whether it's another round, or --

Mueller: They did say they felt they were self-sustaining now, without having to raise money. But they've said that before, too. One last point I'd like to raise is, Elon Musk has lost another one of his long-term lieutenants. Chief technology officer J.B. Straubel, it was announced that he was leaving the company, to become an advisor, whatever that means. But he's been there since 2003. He's one of the longest-term C-level officers to leave. That can't help Musk.

Hill: Yeah, that's another narrative working against this business.