Howes: Tesla growth story giving way to tale of distress, restructuring
Tesla Inc.’s credibility is crumbling on Wall Street.
Shares in the Silicon Valley electric-car maker are down more than 42% so far this year. It’s cutting prices on its high-end Model S and Model X, suggesting the first quarter's sales slump of nearly one-third is no fluke. Consumer Reports says the automatic lane-change feature on its misnamed "Autopilot" driving system lags "far behind a human driver's skill set" and "could create potential safety risks for drivers."
One prominent analyst, Morgan Stanley’s Adam Jonas, this week said the shares could plunge to $10 from Wednesday’s close of roughly $192 under his so-called “bear” scenario. Insiders are selling their shares at the fastest rate since 2013, Bloomberg reports. And Chairman Elon Musk is warning employees that its losses so far this year are not sustainable.
“It is important to bear in mind that we lost $700 million in the first quarter this year,” he wrote staff last week, “which is over $200 million per month. Investors nonetheless were supportive of our efforts and agreed to give us $2.4 billion (our net proceeds) to show that we can be financially sustainable.
"That is a lot of money, but actually only gives us approximately ten months at the first-quarter burn rate to achieve break-even,” he continued, urging employees to tightly control spending. "This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable."
Translation: absent a significant updraft in sales or a reduction in expenses, Tesla won't hit its performance targets. And that's weakening further — Tesla shares slumped another $12.36, or 6.03%, to close Wednesday at $192.69 — any remaining confidence in Musk's ability to lead his company to consistent profitability.
“So the recent reported internal memo, which seemingly called into question prior guidance, didn’t help the risk/reward calculus," Citigroup's Itay Michaeli wrote, explaining his rationale envisioning a bear-case scenario that could see Tesla shares slumping to as low as $36. "The implications can be serious, since an automaker’s balance sheet is always subject to the confidence ‘spiral’ risk."
The continuing sell-off is no coincidence. It represents realistic investors replacing hope with experience and a dollop of instinct: quasi-frantic warnings about slowing the cash burn and squeezing expenses, coupled with softening demand, are the definition of a downward spiral.
In a follow-on conference call Wednesday to explain his $10-a-share scenario, a recording of which was obtained by Bloomberg, Morgan Stanley's Jonas said: "Tesla was seen as a growth story. Today, supply exceeds demand, they are burning cash, nobody cares about the Model Y, they raise capital and there’s no strategic buy-in.
"Today, Tesla is not really seen as a growth story. It’s seen more as a distressed credit and restructuring story. At the heart of this is demand. What is changed is demand. That is the first domino.”
Few places know that sickening feeling better than Detroit, whose market share plummeted as Japanese, German and later South Korean rivals ultimately claimed a majority of the rich U.S. market. A growth story-turned-massively distressed restructuring, the Motor City was an eyewitness to the unwinding of the American auto industry, its employment base and the wealth generation that helped build the modern middle class as we know it.
Yes, I know: Tesla’s a startup led by a visionary innovator. It’s helped transform customer expectations for engineering and software sophistication; proven the existence of a market for high-end electric vehicles; demonstrated that the global auto industry is vulnerable to technological disruption.
Compounding the selloff is the creeping realization that Tesla and Silicon Valley tech heavyweights are not guaranteed to prevail in the bid for leadership in the Auto 2.0 spaces of mobility, autonomy and electrification.
No one is, yet. Tech needs the discipline, manufacturing precision and regulatory acumen the auto industry has mastered over decades. And the autos need to imbue their established cultures with the innovation and risk-taking mindsets of tech companies, whose products and software are transforming modern society and producing enormous wealth.
Tesla looked like it had a perfect shot at melding both worlds. But the prevailing trends increasingly suggest that's not gonna happen.
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.