Just as we expected, Tesla Inc. (NASDAQ: TSLA) reported a net loss for the fourth quarter and ran through about $1 billion of cash.
Bizarrely, the financial media has chosen to focus on the fact that TSLA slightly beat analyst estimates, and on the inexplicable fact that the stock rose 3% in after-hours trading following the report. (Sample rosy headlines include “Tesla reports smaller loss than expected, beats on revenues” and “Tesla Inc. Earnings: Sales Soar, and Model 3 Is Coming.”) They’re also salivating over Musk’s promise to release the all-electric Model 3 on schedule this summer. (Fat chance.)
The media sycophants are completely ignoring the actual numbers, of course.
I’ve painstakingly gone through TSLA’s financials, and here’s what I’ve found…
Ignore These Bogus Gains – And Look At These Very Real Losses
TSLA may prove to be the company that best represents the current market bubble just as large LBOs such as Caesars Entertainment represented the 2007/8 credit bubble and Internet companies like Pets.com epitomized the Internet Bubble that blew up in 2000. TSLA comes fully equipped with a larger-than-life CEO who the media seems to love despite the fact that he lies to it constantly and plays it like a fiddle, a sexy and politically correct product, and a stock price that bears so little resemblance to economic reality as to put the most ridiculous stocks of the Internet era to shame. As I’ve written elsewhere, TSLA is not a stock, it is a cult, and trying to reason with someone who owns the stock is like trying to reason with someone about the existence of God. But sooner or later, TSLA stock will collapse under its own weight. It may take the patience of Job to ride it out, but in the end God rewarded Job for being a righteous man and he will reward those who avoid owning TSLA and those who are able to prudently short the stock.
If you cut through the numbers that TSLA reported, the company had a $266.7 million operating loss for the quarter while missing its target of 25,000 vehicle deliveries (it hit 22,252). (TSLA has not yet released its 4Q16 Form 10Q so this analysis is based on its shareholder letter dated 2/22/17.) Automotive revenues were $1.994 billion for the quarter, down from $2.148 billion in the third quarter as the company delivered 2,569 fewer vehicles. It reported a net loss of only -$121.3 million or (-$0.78) per share, but this number is nonsense. It reduced its operating loss by a non-cash $121.3 million gain on its merger with money-losing SolarCity. If you ignore this bogus gain, it lost (-$1.72) per share.
But its cash flow was much worse, as you would expect for a company that loses money on every vehicle it sells and every solar panel it sells while spending billions of dollars ramping up production of even more money-losing products. The company burned through $448.2 million of cash in operations and another $594.7 million in capital expenditures for a grand total of $1.042 billion. It funded this by raising $1.372 billion during the quarter, bringing its cash balance to $3.393 billion at the end of the year. But as Mr. Musk confessed, the company is going to have to raise capital sooner rather than later before the well runs dry.
With the stock trading at $246/share (at the close on 2/27), he would be wise to strike while the iron is hot and sell as many shares as the market will bear. The company currently has 155 million shares outstanding and could easily handle another 20 or 30 million shares and should raise as much equity capital as soon as possible.
After the SolarCity merger, it has $5.97 billion of long term debt and another $1.15 billion of long term debt and capital leases due within a year. This may not look like a lot now but could start to cause problems later as losses mount (interest expense is now running at a not inconsiderable $260 million a year). Selling a significant amount of new shares will undoubtedly create pressure on the stock, which remains a mystery wrapped in an enigma wrapped in blind faith in Mr. Musk.
Here’s How We’ll Profit
I am happy to take the other side of that trade every day, and you should be, too.
A combination of higher losses, intense competition from numerous competitors around the world, diminished tax incentives (it just lost all tax incentives in Hong Kong, for example), consistent failure to meet financial and production projections and significant dilution tells me that this stock is headed significantly lower. All of the cult members in the world won’t keep this stock at its current ridiculous level just like all of the true believers didn’t keep Valeant Pharmaceuticals International Inc. (VRX) or SunEdison Inc. (SUNE) or all the Internet stocks at their inflated values.
When you look at the cold hard facts of TSLA, there is no way the company can reach profitability without seriously diluting existing shareholders and running up billions of dollars of losses over the next five years. How the stock stays at its current exorbitant level in the face of that remains a bet I wouldn’t want to make. Numbers don’t lie even if charismatic CEOs tell tall tales. Don’t be a turkey. Keep the car, but if you own this stock, sell it. If you want to make some money, short it or buy puts. (You can get my put recommendation here.)