“Tesla bankwuptcy” would perhaps be better termed “shorts losing their shirts.”
I am going to do something crazy. Something not many will be willing to emulate. I am going to believe the Tesla management — the CEO (Elon Musk) and the CFO (Deepak Ahuja) — and trust that they did not lie in their 10-Q SEC filling. There, I did it.
There are many interesting tidbits in a 10-Q, and many more very uninteresting things. I would advise anybody against reading a 10-Q — unless you have an acute bout of masochism or you are paid to do so (and can’t skip and pretend you did), or in case you have to verify some points for an article, like the position I was in.
An interesting tidbit was the following.
“We expect that our current sources of liquidity together with our projection of cash flows from operating activities will provide us with adequate liquidity over at least the next 12 months. A large portion of our future expenditures is to fund our growth, and we can adjust our capital and operating expenditures by operating segment, including future expansion of our product offerings, stores, service centers, delivery centers and Supercharger network.”
This was followed by some boilerplate text about the risks of cash not being available when they need it, which got Seeking Alpha very excited. It proved in the bears’ minds that Tesla was secretly going to raise money in a reluctant and expensive market.
What Tesla is saying in this quote is that they can manage the amount of cash they need by managing the speed at which they grow. As I have often proclaimed, making a profit is a management decision for Tesla. And a dollar in profit is a dollar not spent on growth. This will lead to maximizing the cash flow that they need for growth, and creating the smallest GAAP profit that is undeniably a real profit.
It looks like these past months of production hell and the many crazy reports about Tesla finances have changed the Tesla mindset about speed of growth and use of the capital markets to finance that growth. But the sentiment was changing before, as is evidenced by the CEO performance award for Elon Musk. With a fixed reward for every milestone reached, but with adjusted milestones in case of capital increase from issuing new stock or stock-based takeovers, it did discourage using new stock to grow.
How can this help Tesla to reach bankwuptcy, especially chapter 14.5, the most cherished of them all? What should Tesla’s April Fool’s joke have told us?
A joke like this is only made by very deranged people, or people who know that the likelihood of reaching this state is so far removed it is safe to joke about. Nobody in his right mind thinks the Tesla management is deranged. The only logical explanation was that to those who knew Tesla’s finances better than anybody else, the future looked very good. Why the press did not pick up on this indirect but very loud statement about Tesla’s financials is a mystery to me.
Back to the quote from SEC filling 10-Q: Why do they think the cash will last only 12 months? (See what I did? I twisted the statement just a bit to the negative — the statement reads “at least the next 12 months.”) There are a number of very good reasons to limit this outlook, this forward looking statement, to 12 months.
Tesla does not know the revenue and margin they will have in 12 months. They could be at 5,500/week at 20% gross margin on the Model 3 production. They also could be nearing 10,000/week at >25% gross margin. With that margin of uncertainty, predictions about available cash for growth are very hard to make.
The other unknown is the amount of opex and capex Tesla needs when it has made the plans for its new products and production locations.
Tesla has grand plans for new gigafactories, semi trucks that defy the laws of physics, a crazy roadster that costs just 10% of its competitors, a Model Y, and a Tesla Pickup (with the latter two probably needing a production capacity of over half a million vehicles per year). But Tesla financials in 12 months are as opaque, as I have just described. The company can not make predictions about the state of its finances. However, it did make a statement about how it is going to manage them: “we can adjust our capital and operating expenditures by operating segment, including future expansion of our product offerings, stores, service centers, delivery centers and Supercharger network.”
This situation can only result in great happiness among the Tesla shorts. With plans like that and not knowing what you are doing financially — how much revenue, how much margin, how much spending — bankwuptcy is unavoidable.
And with Tesla living within its means, the long-long stockholders will be enjoying the view of shorts losing their shirts. Here’s are two new ones they can buy:
As usual, the rumors of Tesla’s demise are grossly exaggerated. If you haven’t been fooled in the past 10 years, don’t start falling for the rumors now.