Published on May 31st, 2019 | by Michael Grinshpun0
The Media’s Story About Tesla Is Wrong, Facts Tell Another
May 31st, 2019 by Michael Grinshpun
Tesla’s stock is tumbling in the largest decline in TSLA history, and the media is in a frenzy. The headlines on Tesla are starting to include the words such as “troubles,” “struggles,” and even “doomed.” The narrative says Tesla’s demand is falling, its balance sheet is in terrible shape, and Tesla will run out of cash in 10 months. The narrative also claims that Tesla will miss expectations in the second quarter, and one analyst says that Tesla might go to $10/share from the current $190, which is already down >50% from the highs. However, the data show that none of that is true. Tesla’s orders are at an all-time high in North America and worldwide, the balance sheet is the strongest it has been in 6 quarters, and the average 12-month price target among analysts is $276/share, or 46% higher than today’s price.
First, we will start with demand and quarterly expectations for vehicle deliveries. I recently wrote a piece presenting data showing that Tesla’s orders for Model S/3/X are up 25% so far quarter over quarter worldwide, and Model 3 orders in US and Canada are up 116% (since publishing, they’re up to 130%) quarter over quarter. Analysts and media personalities keep claiming Tesla’s demand is soft in recent weeks, while overlooking the hard data proving that, in fact, demand is rising.
While these analysts are speaking publicly about soft demand, something strange and completely contrary is going on with the expectations that those same analysts are setting for the second quarter. In a recent conference call with investors, analyst Adam Jonas of Morgan Stanley stated that the current “whisper number” for Tesla’s deliveries in the second quarter is “in the mid to upper 70s [thousands]” in terms of deliveries, versus Tesla’s guidance for between 90,000 to 100,000 (which no one believed) as well as Elon Musk’s most recent, slightly lower target (from his leaked email) of 90,700.
This whisper number is in line with the public consensus among investors — 82,092. However, the analyst consensus that the media uses as a benchmark for Tesla to beat or miss, called FactSet, has an estimate of 92,000 deliveries. This FactSet number seems artificially high and designed so that if Tesla pulls off a delivery hell miracle and delivers its new target of 90,700 vehicles in the second quarter, it will still be considered “missing expectations.” Why? Because it is 1.5% lower than the benchmark the media uses despite being >13% higher than the “whisper number” and 10.5% higher than general investors’ expectations.
Next, let us look at the balance sheet and Tesla’s cash position. First, a brief explanation of what a balance sheet tells us: It is a document that every company has in its quarterly report that shows the value of all its assets and all its liabilities/debts, and the total amount by which assets exceed liabilities/debts is called equity. Cash is usually the first line in the balance sheet as an asset and is the only asset that can be immediately used to pay for things, thus making it very important.
Elon Musk recently sent a misinterpreted email to employees that was leaked to the press, in which he made a hypothetical example to illustrate that the new amount of cash that was just raised in early May was not as large an amount as it seems. The example was that if Tesla kept losing money at the same rate as in the first quarter ($700 million), then it would effectively “lose” all the money it had just raised in only 10 months. This was clearly an illustrative hypothetical because the calculation wasn’t even technically correct. He was citing the net loss on the income statement, which includes non-cash expenses such as stock-based compensation and depreciation that have no direct effect on Tesla’s cash balance. Moreover, the net loss also excludes some cash items such as investments that the company makes and any cash raised or paid back as part of financing with banks. You can read more about this email here:
— Elon Musk (@elonmusk) May 28, 2019
The media took this email to mean that Elon Musk was saying that Tesla would run out of cash in 10 months and that the overall balance sheet is unhealthy. Tesla had $2.2 billion in cash before the recent raise of $2.4 billion. Musk’s hypothetical was referring ONLY to the recently raised $2.4 billion. The media suggested that it was Tesla’s entire cash position and that Tesla would actually run out of “cash” in 10 months.
Moreover, the first quarter was an anomaly in many respects, and thus the same level of cash burn will not recur. When you exclude one-time items such as a $920 million debt repayment Tesla made in Q1, a $188 million one time charge for restructuring and inventory price changes, and the $809 million increase in inventory as Tesla refilled the in-transit pipeline that was drained in Q4, then Tesla actually gained >$300 million in cash rather than losing $1.6 billion. All these one-time items will not recur in Q2, and deliveries will be significantly higher in even the most pessimistic of scenarios. So, while the media reports Tesla is running out of cash, the reality is that Tesla will likely post positive cash flows in the second quarter. It is 100% certain that Tesla will not run out of cash in 10 months.
As for the overall balance sheet, which some media personalities on CNBC keep claiming is in dire condition, the reality is that Tesla’s balance sheet is healthy. The metrics demonstrating this are the debt-to-equity ratio (debt divided by the amount by which assets exceed liabilities; lower is better) and the current ratio (assets that are or will become cash over the next year divided by liabilities/debts that are due in the next year; higher is better and >1 is healthy liquidity). Both metrics show Tesla’s balance sheet is the healthiest it has been in 6 quarters, after Tesla’s most recent cash raise. This again directly contradicts what the media is reporting.
Finally, the last misrepresentation of the Tesla narrative that I will cover is the recent media coverage of analyst opinions. Two analysts, Morgan Stanley’s Adam Jonas, and Citigroup’s Itay Michaeli put out research reports with “bear cases” that say Tesla could be worth as little as $10/share and $36/share, respectively. The articles written about this did not emphasize enough nor explain that “bear case” means “most pessimistic” or “worst case” scenarios. Nor did the articles put it into perspective that the overall 12-month average price target of all analysts covering Tesla is $276.56 (46% higher than today’s price).
It is worth noting that there are a ton of interests against Tesla and other electric cars in general. Other automakers have been dragged kicking and screaming into the yet unprofitable electric car markets due to intense competition from Tesla, health and environment regulations, and societal demands. Oil interests, famous for pedaling climate denialism while their own research shows anthropogenic climate change has been happening for nearly 50 years, are now focusing their efforts on curbing electric car sales by spreading misinformation and lobbying against tax credits.
Finally, there are loud, outspoken fund managers such as Jim Chanos (who it seems clear previously manipulated the perceived solvency of Fairfax to drive them out of business), David Einhorn, and Mark Spiegel (who keeps presenting at conferences that Tesla is worth $0 and runs a Twitter account bashing Tesla on basically a 24/7 basis) — all of whom are short Tesla. Besides them, there are thousands of people shorting Tesla and betting against the stock with billions of dollars, who often get their information at dark corners of the internet, such as $TSLAQ on twitter (a conspiracy theory group that runs on confirmation bias to spread their thesis that Tesla will go bankrupt). All of these people and industries rejoice and profit when Tesla fails, and they are known to pressure the media to cover their negative narratives and pester the SEC with requests to sue Tesla and Elon Musk.
$TSLA short interest is $7.26 bn; 38.22 mm shares shorted; 29.03% of float; 0.74% borrow fee. Shorts are down $104 mm in mark-to-market losses today but up $4.53 billion YTD. Shares shorted are up 139k over the last week, +0.37%. pic.twitter.com/fuWtmNumqz
— Ihor Dusaniwsky (@ihors3) May 30, 2019
Here, I presented clear evidence that the media narrative around Tesla is a manufactured crisis of confidence, and in fact, not a tangible crisis. This is not the first time such a crisis was manufactured about Tesla, and certainly not the last. Every time such a crisis is manufactured, it threatens the compensation of hardworking employees at Tesla and can cut off Tesla’s ability to raise the capital it needs to fund its vision of a sustainable future. Moreover, some customers might be deceived into believing that Tesla will go out of business and decide not to purchase Tesla’s products at all. We have heard many such stories along these lines.
With such large interests against the sustainable future, the incentives to manufacture a crisis for the company focused on that sustainable future are clear. Anyone who cares about a sustainable future must educate themselves and others, and, unfortunately, now it is required to employ a healthy does of skepticism regarding media reporting around Tesla, and always fact check it. It is of the essence to call disinformation where you see it, and question the people spreading the it. Complacency could lead to powerful anti-green interests getting richer and more powerful. Beware of the Tesla smear.
P.S. To those who cover Tesla: Win back trust by paying attention to who your sources are, and where their interests lie. Do not claim something questionable unequivocally (like the balance sheet is in meltdown) without at least caveating the statement: the balance sheet is the best it’s been in a while thanks to the new cash raise and could improve if new cash flows materialize.
If you have the power, reject the influence of those who deny climate change or try to slow down its solutions. Finally, do not take the trust of your readers for granted. If you trivially jeopardize the future of humanity by destabilizing the largest sustainability organization the world has ever known in the face of catastrophic climate change through questionable claims, then you’re not “just the messenger” anymore, and you will not be trusted.