If You Want Blood, You Got It–Tesla Redux

When Musk announced his plans to merge Tesla and Solar City, I remarked that “Tesla bleeds cash like a Game of Thrones battle scene.” Elon (who long ago blocked me on Twitter, BTW) apparently recognized this. In an August 29, 2016 email to Tesla employees Musk emphasized how important it was for the company to report a positive cash flow for 3Q16:

I thought it was important to write you a note directly to let you know how critical this quarter is. The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production. Once we get to Q4, Model 3 capital expenditures force us into a negative position until Model 3 reaches full production. That won’t be until late next year.

. . . .

Even more important, we will need to raise additional cash in Q4 to complete the Model 3 vehicle factory and the Gigafactory. The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not “Tesla Loses Money Again”, but rather “Tesla Defies All Expectations and Achieves Profitability”. That would be amazing!

Were you amazed(!) that Tesla eked out a positive cash flow in the third quarter? If so, do you feel like a fool now that the 4Q16 results are out, showing that the blood is gushing again? For in the quarter, Tesla set a record (and not the good kind!) for free cash flow: a cool $1 billion to the negative, -$447 in operating cash flow and $522 in capex. The operating number reflected lower vehicle emissions credits, illustrating the company’s dependence on this source of revenue.

So what?, you say. Elon said that “Once we get to Q4, Model 3 capital expenditures” will make results look bad. But it appears that Telsa actually held back on capex. In the vaunted 3Q guidance, the company implied that it would spend $1 billion in capex in 4Q16: it barely spent half of that. This does not bode well for delivering the Model 3 on time, and demonstrates the dilemma that Musk faces.

Given Musk’s emphasis on delivering a positive cash flow number in the third quarter, it appears that his accountants rose to the task. There raises serious questions about the legitimacy of the third quarter number. It was obviously a one-off. Elon said that it was vital to “convince potential investors to bet on us” by “defying expectations.”  Was it necessary to lie to defy?

Any such suspicions should be strengthened by the, well, suspicious resignation of Tesla’s CFO on the day its 8-K was filed, to be effective when its 10-K is filed.  The reason given is rather odd: Wheeler plans to “pursue opportunities in public policy.” Well, I guess it’s better than “I want to spend more time with my family.”

The resignation of a CFO is never a good sign, especially when it coincides with the release of an ugly earnings report that follows an earnings report that appeared to be too good to be true at the time–and which looks even more too good to be true in retrospect.

Even Elon appears a little anxious. He said that the company’s cash position is “very close to the edge.” So get ready to have your stock watered again, boys and girls: “So we’re considering a number of options but I think it probably makes sense to raise capital to reduce risk.”

Or, to mix metaphors: another transfusion for the bleeder. In the vein, out the artery. Investors and Wall Street have been very forgiving. For years. How long can that continue?