Friday, October 7, 2016
Why the market is freaking out about Tesla
Financial opinions around Tesla are once again lurching wildly.
This always seems to happen when there's a moment to reassess the electric-car maker's stock. On Sunday, Tesla announced that it had greatly exceeded delivery expectations for the third quarter, with 24,500 vehicles officially sold to customers.
That news didn't send the stock on a run. After a modest 5% bump, Tesla shares slipped back to around $210.
Then they fell off a cliff on Thursday, when Goldman Sachs downgraded its Tesla rating to "neutral" and dropped its target price to $185 from $240. This follows a much more substantial downgrade by Morgan Stanley's reliable Tesla bull, Adam Jonas, who had earlier pulled back his target price to $245 from a lofty $465.
For many analysts, Tesla has nowhere to go but down, given that the company has probably achieved as much rapid growth as was possible and now has all its value effectively "priced in." That situation offers a $30 billion market cap and a return of over 1,000% for the earliest Tesla investors — those who got in back in 2010, when shares were $17.
But for the past year, it's been slowly dawning on Tesla analysts that this onetime high-tech, high-growth company out of Silicon Valley isn't the Amazon of automobiles. Rather, it's a maturing carmaker, a new entrant in one of the most capital-intensive businesses yet devised by humans.
Putting aside worries about Tesla's other business lines — the $2.6 billion SolarCity acquisition, the emerging energy-storage enterprise, the $6 billion battery factory in Nevada — all attention has now shifted to near certainty that Tesla will once again need to sell shares to raise money, several billion in all likelihood.
Market observers have griped that there's a deep conflict of interest between banks such as Morgan Stanley and Goldman Sachs grabbing Tesla's stock issuances at the same time they're making calls on its share price, but at the moment, those banks look as though they're trimming their expectations for Tesla as an investment.
Tesla isn't going to get a free pass on its capital burn forever. At the moment, capital discipline is all the rage in the auto industry. Fiat Chrysler Automobiles CEO Sergio Marchionne has been dining out on a scathing presentation he gave last year called "Confessions of a Capital Junkie," in which he excoriated the auto industry for its flagrant cash-burning ways.
General Motors executive leadership is also preoccupied with how it's spending its money — and it has a lot to spend. GM President Dan Ammann told Business Insider last week the automaker is making $1 billion a month. But GM is explicitly engaged with committing only to markets where it thinks it will see a good return on investment. That drove a decision in 2015 to exit the Russian market, one once thought to have the potential for major growth.
Tesla hasn't historically been bad at capital discipline; over the course of a year, it has a fraction of what a GM or Ford or Toyota might spend in a quarter, so it has to watch every penny. But CEO Elon Musk and his team are now in triple-secret double-down mode — I know that doesn't make any sense, but Tesla future investment requirement are almost comically ambitious — and from the perspective of leadership, it would be dumb to let the stock slip before heading back to the markets to raise money. Musk wants to produce 500,000 vehicles annually by 2018, and getting there ain't gonna be cheap.
The bottom line is that Tesla sees its stock price as a means to an end. The company's own investment thesis, such as it is, asks investors to take a long-term view: Tesla will be a major player in the future of transportation. Whatever happens with the stock price day-to-day is a distraction. All that matters is that Tesla shares be considered valuable when it's time to create a new cash pile.
Tesla is right on the edge of crossing a river when it comes to how it spends money. As it gets bigger and has to manage more lines of business, capital efficiency will become vastly more important. But for now, Tesla's capital exists to be spent, and that's clearly freaking out the analysts who cover the company.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.