It's starting to look like Tesla has turned a corner on its latest crisis (TSLA)

elon musk

  • Tesla has endured an epic crisis with its Model 3 vehicle, but the stock price has held up.
  • Tesla has spent its entire 15-year existence lurching from crisis to crisis, always recovering.
  • As the company starts to move clear of the Model 3 crisis, bearish investors are going to have to difficult time supporting their thesis about the company. 
  • They may have to wait for the next crisis to strike.

Tesla builds all-electric automobiles, but it also manufactures two other things: stock-price volatility and business crisis.

The company is 15 years old, but these patterns have never changed and aren’t likely to anytime soon. The original Roadster — Tesla’s first vehicle — was the product of a management crisis, back when then-investor Elon Musk took over as CEO and displaced founder Martin Eberhard.

Tesla almost went bankrupt in the year before the financial crisis, rescued only by an 11th-hour funding round, along with a Department of Energy loan and stakes from Toyota and Daimler.

Tesla’s first purpose-built car went through its own crisis, a problematic early production process as Tesla learned how to make cars. 

The Model X SUV brought “production hell” into Musk’s vocabulary; he later admitted that the car was hubristic and massively over-designed.

The theoretically mass-market Model 3 should have been much easier, but it’s created the biggest crisis of all as Tesla has serially botched its manufacturing process, falling well short of Musk’s production targets and once again overthinking the manufacturing aspect by trying to heavily automate the vehicle’s assembly.

On the stock front, the price can swing $100 up or down in a week. Over the past 12 months, the range has been from $245 to $390. 

If you put all this together and try to think it through rationally — and also take into account Tesla’s massive appetite for capital — you might reasonably conclude that Tesla is doomed. A titanic number of short-sellers are relentlessly driving home this point, even as the stock shrugs off their dire predictions. 

The bulls don’t get a pass, either. Musk and Tesla routinely do things to undermine their enthusiasm. The Model 3 is Exhibit A: Why is Tesla having so much trouble building a mid-size sedan, something Toyota has been accomplishing for decades with exactly zero drama?

But as rough as matters have been in Teslaland since the middle of last year, the company has hung in there. It hasn’t been pretty, but as we head in the second half of 2018, it now appears as though Tesla has turned a corner on its latest crisis. This just means we should prepare for the next one, so the ongoing war between bulls and bears, long and shorts, isn’t going to cool down. 

But the company is in better shape than it was six months ago. Here’s why.



The Model 3 is on the road.

Seeing is believing. For much of the past 12 months, the Model 3 has been an abstract concept, a unicorn-mobile debated by financial insiders and those with a lot of knowledge about the auto industry.

But now it’s starting to show up in reality. I’ve spotted half a dozen in the wild over the past two months (I’ve also driven the actual car). The shock of seeing a Model 3 isn’t like what happens when a Ferrari or McLaren rolls past; it’s a mid-size four-door, a cool-looking, but an essentially normal car. 

Tesla has 400,000 pre-orders for the vehicle and has sold about 30,000 to date. In total, the company has sold around 200,000 vehicles in the US, so in a year or two, assuming the Tesla production system doesn’t collapse, the Teslas the people see on the road are going to be Model 3’s.

Owners are also going to share their thoughts about the car, and they’re going to be good. I drove the car for a few hours and I thought it was basically terrific. To be sure, there could be all manner of early production issues, but that would be par for the course with Tesla. Positive word of mouth is the best marketing that there is for an automobile: traditional automakers spend billions annually to engender it.

Tesla’s naysayers have upped their game since the beginning of the year (and Tesla has certainly helped their case with stuff like a massive tent in the carmaker’s factory to achieve higher Model 3 assembly), but they’re now trapped in a beat-the-clock situation. The physical fact of the car is going to steadily refute the negativity — even of the car isn’t perfect, and given Tesla’s record, it probably won’t be.

This is how things always go. The Toyota Prius was scoffed at when it first appeared in the 1990s and early 2000s — ugly, underpowered, limited buyership — but as of last year, over six million have been sold.

Tesla can start to hype Model 3 variants — and talk more about forthcoming vehicles.

We’ve been hearing about the Model 3 for years, but now the car has arrived and, over time, it should settle into Tesla’s version of predictability, which is to say nothing that resembles the predictability of the rest of the industry.

We’ve already witnessed the announcement of the high-performance, all-wheel-drive version of the car, stickering at almost $80,000. Look forward to new styles and different flavors, as well as assorted subplots about software updates. This is how Tesla drives its story forward: lots and lots of newsbytes.

On the horizon, Tesla has four new projects to captivate the masses and the markets: the new Roadster, with its Formula-One-car level acceleration; the Tesla Semi; a possible pickup truck; and the Model Y compact crossover.

The Model 3 and its ongoing struggle will soon become water under the bridge. Such was the case with the Model X, a much-scrutinized and debated vehicle that launched in 2015 and has now been chugging long for a few years, bringing in massive amount of revenue for Tesla (well-equipped Model X’s can top $150,000). 

The Model X is now integrated with a production system at Tesla’s Fremont factory that can reliably build about 25,000 of both vehicles combined every quarter. It’s gone from high-drama, crisis-state production hell to something nobody ever talks about anymore, its relative success drowned out by Model 3.

Model 3 could continue to throw up problems, but the Tesla story will shift to new stories in late 2018 and early 2019.

Capital raises and debt funding.

Musk has declared that Tesla won’t need to raise money in 2018 and will be profitable in the second half of the year.

Even if we take him at his word and Tesla can somehow avoid spending the roughly $3 billion it has in cash on hand and doesn’t tap out its lines of credit or have to borrow from SpaceX, that doesn’t mean Tesla won’t raise money in the future or post money-losing quarters.

With Tesla’s stock price at historically quite high levels, it makes the most sense to raise money by selling new shares. I don’t know why they haven’t done it already. But that’s Tesla’s business.

The company has a lot of spending ahead of it. It’s Fremont, CA factory is maxed out on capacity, the Roadster and Semi have to be developed and built, and a new plant in Shanghai, China needs to be funded.

Automakers typically bankroll this long-term stuff with debt. A new factory, for example — and Tesla’s China plant should be wholly owned by the carmaker, as China has adjusted its joint-venture rules — will be around for decades, so using debt to find the investment allows companies to use the magic of inflation to reduce that financial burden over 20 or 30 years.

Tesla isn’t in a great position to sell bonds at the moment: a 2017 offering was successful, but Tesla’s debt is junk-rated, not investment-grade. Its equity is the opposite, but the company doesn’t want to sell $1 billion- $2 billion at a clip and continually dilute existing shareholders. Obviously, if shares surge past $400 at some juncture, selling equity will become more tempting.

Musk might also sell a big chunk of Tesla to a major outside investor, somebody like China’s Tecent, which took a 5% stake in 2017. 

Regardless, Tesla’s current austerity program isn’t likely to last.

See the rest of the story at Business Insider

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