How Will Tesla Survive?

In 1605, Shakespeare wrote King Lear.

It was in Act 5, Scene 3 that Regan said…

Jesters do oft prove prophets.’

You might be more familiar with the modern day version…

‘Many a true word is spoke in jest.’

On April 1, Elon Musk, of Tesla fame, tweeted…

Elon Musk Tweets 'Tesla Goes Bankrupt' 06-04-2018

Source: Twitter
[Click to enlarge]

The tweet was sent before 12pm and therefore qualifies as an April Fool’s joke.

But is the jester proving to be a prophet?

According to CNBC on 2 April 2018:

‘March 2018 was Tesla’s second-worst month, with prices falling 22.4 percent.’

And why was that (emphasis added)?

‘UBS analyst Colin Langan says Tesla’s stock is dropping for two reasons: a fatal crash involving a Model X and the company’s slow rate of Model 3 production.’

Since hitting a high of US$385 in September 2017, Tesla’s share price has fallen over 25% in value.

You see, at some point you have to ‘walk the talk’.

Musk talks a lot, but delivers little to justify Tesla being a US$46 billion business.

Will Tesla recover?

My answer is an emphatic ‘no’.

Tesla cannot meet its lofty production schedule. Adding insult to injury, Tesla also has a quality control issue to be addressed.

‘Tesla is voluntarily recalling 123,000 Model S vehicles because of an issue with the power steering component.’ ­– CNBC 29 March, 2018

In an effort to increase production output, Tesla appears to be sacrificing safety.

Michael Lewitt of (the very witty and highly informative) ‘The Credit Strategist’ wrote recently…

‘I used to tell people “Keep the car, sell the stock.” But now I can’t say that with good conscience. It is increasingly clear that Tesla’s vehicles, however cool they look, are potentially unsafe.

‘The Model 3 is being rushed to market without the normal testing that every other vehicle in the world undergoes. Nearly half of Tesla’s vehicles appear to roll off the assembly line with serious flaws. In what world is this remotely acceptable? ‘

Musk has captured the hearts, minds and money of those who believed in his vision.

Others — like myself — thought it was more delusion than it was vision.

Readers of The Gowdie Letter have been frequently warned about the Tesla illusion.

The warnings were not because I recommended shorting the stock. But rather that Tesla is such a standout example for this period of grand delusion proudly sponsored by the world’s central banks.

The Gowdie Letter February 2016

‘Tesla’s another one I don’t get. I know Elon Musk is one seriously smart guy and a visionary, but at some point the market will want that genius IQ to deliver cold hard folding stuff to shareholders. That’s how it works. At present Tesla loses US$5 per share and is valued at US$21 billion – naturally it does not have a PE ratio for the same reason as Twitter doesn’t have one…you cannot multiply red ink.’

The Gowdie Letter 3 November 2017

‘…back to Tesla.

‘At the same time as Tesla share price went parabolic, so did its free cash flow…but in the opposite direction.

‘The minus signs (on the left hand scale) are LOSSES.

Tesla Free Cash Flow 06-04-2018

Source: Business Insider
[Click to enlarge]

‘How is Tesla financing these losses? 

‘Glad you asked.

‘According to CNBC on 11 August 2017…

  • Elon Musk’s electric car company raised $1.8 billion, $300 million more than expected, at a yield of 5.30 percent, slightly above original guidance.
  • The greater-than-expected figure indicated high demand for Tesla’s debt offering amid this week’s drop in high yield bonds.
  • The company has burned through billions of dollars in the last few years.

‘What did the ratings agencies think of the issue?

‘S&P rated the bonds negative B and Moody’s B3

‘What does that mean?

‘This is the table from Investopedia.

Bond Rating 06-04-2018

Source: Investopedia
[Click to enlarge]

‘At negative B and B3, Tesla is deep into junk bond territory…high risk.

‘Yet, investors have thrown US$1.8 billion to participate in Elon Musk’s grand vision.

‘…The projection was to produce 1500 Model 3 vehicles by 30 September 2017.

‘But wait, there’s more. By the end of 2017, the production number will be 5000 PER week…simple maths says that in December — only a month away — Tesla will have 20,000 cars rolling off the production line.

‘I know it’s a pesky and insignificant question to ask when you have a much grander vision of living on Mars or solving the world’s energy problems, but “just how are the production numbers going?”

‘According to the [Wall Street Journal] article published on 3 October 2017 (emphasis is mine) …

‘”The Silicon Valley electric-car maker built 260 of the Model 3s between July and September…”

‘Tesla only missed the its 1500 target by a mere 80 percent.

‘And in the 3rd quarter, it produced around one percent of what’s forecast to come off the production line in December alone.

‘But, this should come as no surprise.

‘Elon Musk has form in making bold predictions.

‘This is an extract from Tesla’s investor update published in May 2016 (emphasis is mine)…

‘”Additionally, given the demand for Model 3, we have decided to advance our 500,000 total unit build plan (combined for Model S, Model X, and Model 3) to 2018, two years earlier than previously planned. Increasing production five fold over the next two years will be challenging and will likely require some additional capital, but this is our goal and we will be working hard to achieve it.”

‘Wow, 500,000 cars by 2018…time is ticking.

‘None of this serial over-promising and under-delivering seems to matter in the slightest to investors. Dumb investors using dumb processes are not rewarded with smart outcomes.

‘…Tesla stock is going over the cliff.’

The Gowdie Letter December 2017

‘In every boom there are telltale signs of excess.

‘This boom has been so widespread – across countries and asset classes — that selecting the contenders has not been easy.

‘We have…

  • Aussie home prices.
  • US technology shares trading on PE multiples in the hundreds.
  • Tesla – it may not burn fuel, but it sure does burn cash.
  • The dollars flowing into passive investments – there are more Exchange Traded Funds (ETFs) then there are shares on offer.

‘And this is just to name a few.

‘However, at the peak of insanity there are some things that are certifiable lunacy.’

The Gowdie Letter January 2018

‘Tesla is a classic bull market con. Elon Musk has convinced so many people that a company built on ‘over-over promising and under-under delivery’ is worth US$50 billion. What a joke. When the chapter on this period of stupidity and excess is finally written, Tesla will be virtually worthless.

‘Bitcoin and Tesla are just bit players in a much grander show of illusion.’

The other big carmakers are not sitting idly by.

According to Stanphyl Capital:

‘Early in March [2018] Jaguar introduced its new I-PACE electric SUV, which will be available in European and U.S. showrooms this June or July.

‘It’s initially priced nearly $10,000 less than the ugly and unreliable Tesla Model X and when Tesla runs out of $7500 tax credits later this year the Jag will be nearly $17,000 cheaper!

‘Also in March at the Geneva auto show Audi ran a fleet of 200 pre-production E-tron Quattro electric SUVs that will be in European showrooms this December and in the U.S. early 2019, priced approximately $14,000 cheaper than the roughly equivalent Tesla Model X 100D ($21,000 cheaper after Tesla’s tax credits run out).’

Porsche and Mercedes are also rolling out E-cars.

Tesla is a joke…a very sick joke being played on those gullible enough to think the April Fool can make a profit.

The only profit Musk will make is the one spelt ‘prophet’.

Tesla is only a part of a far grander delusion.

The court jesters who masquerade as prudent central bank governors are playing a much sicker joke on all of us.

Have you heard the one about ‘how do you solve a debt crisis?’

‘With more debt.’

It would be funny if it wasn’t true.

Sadly, this is what passes for serious economic management.

In 2008/09 we saw the after effects of the central bankers’ sick joke.

Next time will be far worse.

To paraphrase Shakespeare

History does oft prove to be a prophet.’


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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