Howes: Tesla's latest dash for cash highlights strength, weakness
Tesla Inc. CEO Elon Musk hasn’t yet run out of other people’s money — partly because he’s still willing to risk a piece of his own prodigious fortune to keep his automotive dream alive.
In public filings Thursday, the Silicon Valley electric-car maker confirmed plans to raise as much as $2.3 billion from investors by offering shares and selling convertible bonds. That includes Musk taking a fresh 41,896-share stake worth roughly $10 million, partial atonement for his antics and troubled relationship with the Securities and Exchange Commission that keeps life interesting for Tesla shareholders.
The Palo Alto, Calif.-based automaker said it would offer $1.35 billion in convertible notes due in 2024, and would offer $642.3 million in company stock to "strengthen" its balance sheet and fund "general corporate purposes" just weeks after stunning investors with widening losses and slowing sales of its electric vehicles.
Tesla shares rose on the news, of course, closing up 4.3 percent at $244.30 per share. This is also the ground-breaking EV company that posted a $702 million first-quarter loss last month, that reported softening demand for its electric cars, that is watching as federal subsidies for its EV buyers phase out and Tesla becomes a victim of its own success.
“This indicates Tesla can’t yet rely on cash from operations to fund its deeper penetration into autonomous-driving technology, advanced chips, insurance and China," Kevin Tynan, senior autos analyst for Bloomberg Intelligence, told Bloomberg. "Tesla’s 31% delivery decline in 1Q vs. 4Q signaled that U.S. demand isn’t sustainable at the elevated 2H levels, while its international rollout is just beginning."
Meaning the positives of an effort to raise yet more cash arguably could be papering over potentially bigger negatives: that Tesla's rate of cash burn is outstripping its ability to generate cash through the sale of its EVs, especially its Model 3; that international expansion — chiefly, financing and logistics — are proving more costly and difficult than assumed; that new competition and negative publicity are taking a toll on the business.
The outlook is mixed.
"Notwithstanding some progress, Tesla faces some considerable challenges," Bruce Clark, senior vice president of Moody's Investors Service, said in a note. The hurdles include introducing the Model 3 in China and the European Union; competing with traditional automakers "that are devoting massive amounts of capital" to electric vehicles "and are highly capable of mass production of technologically complex" vehicles; coping with slowing demand for the Model 3 as the existing pool of "first adopters" shrinks.
Still, Moody's says Tesla's "credit strengths" include the "highly competitive position" of its EV models in the luxury car segment, the "potential strategic value" of Tesla to rivals in the EV and autonomous-vehicle market, and the "approximately three-year lead" Tesla has with its "market-attractive" battery-electric vehicles — which, last year, accounted for less than 1% of the global light vehicle market.
Tesla's growing record of innovation and brand equity is, however, offset by other concerns: relentless cash incineration, Musk's continuing tangles with federal regulators over his Trumpian tweeting, fiery accidents that draw lawsuits and undermine confidence in the automaker's foolishly named "Autopilot" that is no such thing in the literal sense of the word.
Moody's flags two more cautions not easily dismissed. First, that for all its leadership in EVs, Tesla enjoys "no sustainable technological advantage" because "essentially all" of the technology integrated in Tesla vehicles "will largely be available to competitors." And, second, that the revolving door in the executive offices, as well as continuing shifts in production schedules, pricing, workforce levels and retail strategy, complicate efforts to manage effectively its cost structure.
Tesla occupies a commanding position in the comparatively tiny, if influential, EV market. Maintaining it depends on consistently executing a plan whose continual changes do more harm than good.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him at 3 p.m. and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.