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Tesla's Musk is Drinking the Kool-Aid

05/06/2016 9:20 am EST


Michael Berger

President & Founder,

After Tesla reported earnings, CEO Elon Musk said the company would deliver 500,000 cars during 2018, which seems impossible after losing the two vice presidents responsible for building the cars; Michael Berger, Associate Editor of highlights Tesla as a short target and provides his rationale for his thesis.

According to Mad Money host Jim Cramer, Tesla CEO Elon Musk is getting away with financial murder.

Although I do not always agree with Cramer, his statement about Musk was spot on. On Mad Money yesterday, Cramer said, “During any given earnings season we have executives who really push the envelope and do things that are totally outrageous. But we have never seen the likes of Elon Musk in our lives.”

Loss Increased 84% From the Prior-Year Period

Tesla Motors Inc. (TSLA) reported first quarter 2016 financial results after the market closed on Wednesday. The electric vehicle manufacturer reported a first-quarter loss of $0.57 per share on $1.6 billion in revenue. Analysts expected Tesla to report a loss of $0.58 per share on $1.6 billion in revenue, according to a Thomson Reuters consensus estimate.

While sales increased 45% from the prior-year period, Tesla’s loss per share was significantly larger than the loss of $0.36 per share reported a year earlier.

Although Tesla's sales increased 45% from the prior-year period, its loss increased 84% to $282 million as it struggled with parts delays for its new Model X SUV. Stock-based compensation costs also more than doubled during the quarter to nearly $90 million.

Musk is Drinking the Kool-Aid  

Analysts expected Tesla to deliver 19,000 cars during the first quarter, and Musk delivered just 17,000. He now projects that Tesla will make 500,000 cars by 2018 and 1 million cars by 2020.

Musk said the new goal will likely require additional capital and that 2016 capital expenditures will likely be 50% higher than the previous guidance of $1.5 billion. Since Tesla said it wouldn’t need to raise additional capital back in February, this marks an abrupt reversal.

If these statements were not enough to shock you, Tesla also used Model 3 deposits to pay down its asset-backed line of credit…

An Impossible Goal

Tesla CEO Elon Musk seems to think he can say whatever he wants and get away with it. During Mad Money, Cramer also said that Musk’s transparency is shameless.

Although Tesla previously said it would deliver 500,000 cars by 2020, the company advanced its production target to 2018, citing demand for the Model 3.

How can a company that is not able to deliver 50,000 cars in six months deliver 500,000 cars in one year? To put this into perspective, Tesla’s 2018 production goal is 10 times the number of vehicles it produced in 2015.

The Stars Will Need to Align

If Tesla wants to hit this goal, the company will need to execute flawlessly. Tesla will need to bring its Model 3 to market on schedule, and with great momentum.

Not only will Tesla have to come to market with its first mass produced car on time, but its battery factory in Nevada must grow and prosper, its costs must come down, and its car-making capacity must scale up at an incremental rate.

By the way, Tesla has never been able to hit one of Musk's timelines for a new product launch. Not even once.

Five Executives Have Left Tesla During 2016

Bill Gross presented a study on why startups that he invested in succeeded or failed on a Ted Talk during 2015. Gross said the most successful startups he invested in were done at the right time and had the right team.

Tesla’s team is shrinking. On Wednesday, Tesla said that two key executives will be leaving the company.

Greg Reichow, vice president of production, and Josh Ensign, vice president of manufacturing, are the two executives leaving Tesla. Reichow has been with Tesla for more than five years and has led the production team for the past three years.

With the departure of these two executives who were responsible for building its cars, Tesla has now lost a total of five VPs since January. These departures have come as production challenges have mounted and many analysts have questioned the reasons behind the executives’ departures.

It is safe to say that the loss of these executives will make not make it easier for Tesla to hit its lofty expectations.

Tesla is a Short Target

Tesla needs to raise capital. Wall Street knows it, Cramer knows it, and even Musk admitted it.

Cramer said that Musk’s forecast was simply a way for the company to raise money on Wall Street and get people to send deposits for new orders.

On Wednesday, billionaire hedge fund manager Jim Chanos said that he is betting against Elon Musk. Chanos said, “One of our historical sign posts of a company in trouble is when numbers of senior people leave over a short period of time. Tesla fits that bill.”

We agree with both Chanos and Cramer. We expect to see TSLA trade lower over the next few months and view the company as a profitable short target due to: 1) its need to raise capital, 2) its high expectations, 3) its production and manufacturing issues, and 4) its lofty expectations and valuation.

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