Elon Musk was dismissive of analysts’ concerns about profitability on the media call following Tesla’s latest quarterly results – but should investors be concerned about the rate he is burning cash?
Electric vehicle maker Tesla’s quarterly results statement ended up being pretty controversial and sent the company’s valuation down by about $2bn in after-hours trade. Chief executiveElon Musk cut off analysts asking questions he did not like and got defensive when asked probing questions about the company’s finances.
When one Wall Street scribe had the temerity to ask about potential funding requirement, Mr Musk dismissed the question by stating: “Boring bonehead questions are not cool. Next!” He told one analyst questioning potential margin contractions “not to make a Federal case out of it”.
Part of Mr Musk’s job is dealing with questions from analysts – and being dismissive of questions from Wall Street players is probably not a wise move. After all, the rate the company is burning through cash has to be an issue for all concerned. The good news was that Tesla beat expectations in terms of revenues and its loss per share came in at $3.35 a share, slightly better than a consensus view of $3.58. However, once again it burnt through $1bn of cash in the three-month period as it ramped up production of its Model 3, the mass-market version of its electric vehicle. There have been concerns that the company may need to raise cash to keep going, as the increase in Model 3 production has been hit by various snags.
Mr Musk promised 5,000 Model 3’s a week would roll off the production line by the end of 2017. But in the final three months of the year, Tesla delivered just 1,550 of these vehicles. Mr Musk now insists the target will be met “in about two months”. As the company has rushed to increase output of the model, there have also been questions about its build quality.
Munro & Associates, a well-regarded US “competitive benchmarking” company that takes apart products to critique their design, compared the Tesla Model 3 build quality to that of a “Kia from the ‘90s. Others have also noted how the vehicle is “rough around the edges”. However, the company has been working to put these right. In a move that should also reassure us human beings, Mr Musk noted overnight that his quest for full automation was part of the problem. “We went too far in the automation front and automated some pretty silly things,” he said. The robots haven’t quite taken over yet.
So, it is clear that there are issues that Tesla needs to work though. However, one of the major criticisms of analysts in the City of London and on Wall Street is that their obsession with quarterly earnings makes them far too short sighted. The next few quarters are relatively insignificant in the context of an ongoing transport revolution. Tesla really could be producing the cleaner “car of the future” and so its total addressable market is massive. Many – including Mr Musk – would argue that in cases such as these traditional valuation methods are less applicable.
However, even a company in this position needs to have a strong balance sheet so it can actually operate on a day-to-day basis. It must also prove itself operationally. The worries over any potential fundraising and what improving build quality will do to margins are therefore very important questions and Mr Musk was wrong to dismiss these concerns without even attempting some redress.
All of this means that the shares are likely to see significant ups and downs in its share price. Mr Musk appears to agree. Last night he said: “I think that if people are concerned about volatility, they should definitely not buy our stock. I’m not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go.”
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