In the Q1 2018 earnings call on Wednesday, there was an Elon Musk who clearly was not in the mood to be nice to Wall Street and the financial press.
The most telling answer was perhaps to the question of Adam Jonas whether it was a good time to raise capital when it was clear that Tesla did not need to raise capital. Adam Jonas is kind of a friend of the family, as far as financial analysts can be. A curt “No. I specifically don’t want to.” was all that Adam got for his nice softball question. Here’s was the quick back & forth:
Elon, so, you repeatedly said I think in recent weeks that you do not need to issue equity capital at Tesla, and I think many investors on this call would say it’s better to raise capital when you don’t need to. So, I guess the first question is…
Yeah, you may not need to, but do you want to?
No. I specifically don’t want to.
And then there was Sacconaghi, who appeared to have not read the shareholder letter or listen to the conversations before him. And if he had, he surely did not agree with it. He got his question answered by Tesla CFO Deepak Ahuja, reiterating what was in the shareholder letter and elaborating on what was said before.
His follow-up question was worse. After explanations that the lower capex was possible because Tesla could do more with less, he asked what investments were scrapped and what were the consequences on battery and Model 3 production capacity. A patient Deepak tried to convey to this bonehead how it was possible to be more efficient with money.
Mr. Sacconaghi’s second follow-up question beat all. After Elon set the talk of the financial town earlier by saying the Tesla did not need to raise money and he did not want Tesla to raise money, Sacconaghi asked how much money Tesla needed to raise. This is not his question verbatim, but that is the gist of it. He essentially told the Tesla management that he knew their financial situation better than they did, and would they please admit that they were wrong. Again, this is not at all verbatim, but what was implied. Musk’s reaction to this: “Excuse me. Next, next. Boring follow up questions are not cool. Next.”
That reaction is really not so bad in full context — and certainly not as wild as it may have seemed to people who weren’t closely following or reading into the boring, boneheaded questions.
Joseph Spak, the guy who was cut off in favor of “the YouTuber,” just had the bad luck of being next after Mr. Sacconaghi and asking the wrong question at the wrong time.
I only mention Sacconaghi and Spak because these exchanges have created a lot of reactions in the press and on the internet. This is not material to what this piece is about, but it is a perfect illustration of the problem Tesla is having with Wall Street.
While writing this, I came across another, perhaps better example. It was on Bloomberg TV and was a discussion between Tesla-friendly interviewers and Tesla bull Ben Kallo (stock target $411), all showing why Tesla and Musk have had it with Wall Street.
Here’s a transcript of the Bloomberg interview starting about halfway:
Bloomberg interviewer 2: He is burning over a quarter billion in the quarter. He is likely going to need some more cash before the year is out. Even with success for the Model 3, how is he going to get that cash? Does this really mean he has to go to debt markets rather than equity markets to raise it?
Ben Kallo: So, he (Musk) reiterated he is not going to raise cash. Now, no one believes that out there because that is the sentiment out there. Now, if he was really trying to pander to the market, he would not have acted like that. What I think is something the bears are missing here and saying “Oh, he is a fraud” or “He is a huckster” or whatever kind of term you want to use — of which is getting louder and louder — but for a guy who is saying, “Hey, don’t buy our stock if it is volatile if you don’t want to be there,” that is a kind of honesty that we don’t hear from many CEOs out there.
Bloomberg interviewer 1: But what is the …. point? If they are basically going to burn through the majority of their cash this year with a buffer of like $1 billion, they simply have to go to the market. Will it be as open as it was before?
Ben Kallo: Well, I think if they deliver on metrics he set out ramping the Model 3 and hitting their gross margin targets and hitting profitability, I think the market will be over — open — and I think along the way, and that was what I was trying to get out of the way, if you give them some updates, the market is opening up to you.
(Highlights are mine)
Ben Kallo should have answered that if Tesla delivers on its forecasts, Tesla does not have to go to the markets. That is the whole point that even Ben Kallo is not getting or is not saying.
In a disagreement like this, there can be three reasons for the disagreement: One party knows more than the other party, one (or both) is stupid, or one is dishonest. The analysts don’t know more about Tesla’s finances than Tesla — that can’t be the reason. Both Tesla and the analysts are pretty sharp people — stupidity also can’t be the cause of the disagreement (I think). That leaves dishonesty as the only explanation why the Wall Street community thinks Tesla needs to raise money while Tesla thinks it doesn’t need it. More specifically, Wall Street thinks Tesla is dishonest.
What Sacconaghi thinks is clear, but Ben Kallo’s answer shows ambivalence. He has to make a choice. If he thinks that Tesla is honest, the next time he is interviewed, he should answer the way I proposed he should.
And this brings me to my argument. I was getting for some time the feeling that Tesla was not happy with external financing, the shorts, the bears, and Wall Street in general. Reading the update letter enforced that feeling. The answer to Adam Jonas confirmed it. The “No. I specifically don’t want to.” Was not about 2018. It was about ever.
It was my impression that the original plan for the Model 3 was self-financing through a slow ramp and incremental building of the assembly line. The number of reservations changed those plans. Tesla accelerated the development of the car and design of the production and shortened the ramp by a whole year. And Tesla paid dearly for it. Comments about the Model Y and Model 3 manufacturing pointed in that direction.
Tesla will take its time to design the Model Y and the production process of the Model Y because the biggest gains in cost control are to be had in good and early design. The rushed design of the Model 3 resulted in less optimal production process and delays in the ramp. Doing it slower and stricter can result in getting there faster and better.
In software development, we use a simple metric for the cost of correcting mistakes. If the mistake is made/discovered in the global design, the cost is 1. If the mistake is made/discovered in detail design, the cost is 10. If the mistake is made/discovered programming, the cost is 100. If the mistake is discovered in testing, the cost is 1,000. If the mistake is discovered while in production, the cost is 10,000.
There is another advantage in taking more time for the design of the Model Y and the Model Y production lines. Tesla has more time to bring the Model 3, Tesla Energy, and Tesla Solar to profitability. Most people should be able to understand that it is hard to finance a 500,000/year new model plus a new energy storage business and Gigafactory with the proceeds from two 50,000/year vehicle models. But the proceeds of these combined products can be used to finance the next new products, if Tesla keeps the speed of growth within the possibilities of the cash generated.
I have a very strong impression that Tesla is only looking at self-financing for its future products and factories.
And being free of the yoke of Wall Street opens up a host of other possibilities.
The first was already mentioned in the update letter. Tesla will stop with the problematic quarterly logistic dance to satisfy Wall Street with easy-to-understand numbers. This means a bigger number of vehicles in transit at the end of a quarter, and more regular deliveries to the customers and a far easier job for Jose Pontes of the EV-Sales Blog to account for all the deliveries.
The second thing that is possible when Tesla does not need to pander to Wall Street: I would like to see non-GAAP accounting with all the sales with a resale value guarantee as normal sales in the profit and loss, and a small, experience-based reservation for the possible future costs on the balance. Please publish the 2016 and 2017 quarters in this way. I am sure Tesla has these for internal use.
And last but not least, when no longer afraid to confuse the Wall Street analysts and the auto journalists with the relevant numbers of production and deliveries, please give us monthly or quarterly numbers. I would like to see:
— backlog per model
— production per model (already published)
— deliveries (fulfilled orders) per model per geographic area (USA, EU, China, rest)
— sales from stock or as new (test, loaner, showroom cars)
— orders received — this is known when backlog and deliveries are published
The crazy theories Wall Street and the denizens of Seeking Alpha will spin won’t matter anymore. And investors needing help to interpret these numbers can come to sites like this. We will be glad to help, and this is the kind of information companies with a build-to-order sales model like Boeing and Airbus also publish.
One other thing: I think that the stormy weather in Shortville is going to feel like a day on the beach compared to what is coming to the shorts, but that is another article.