By Scott Tzu
By now, many of you have probably seen the email that was leaked from Tesla (NASDAQ:TSLA) corporate and reported on by Bloomberg on Friday. We wanted to comment today as to why we believe this email will ultimately have a net negative affect on Tesla as an investment going forward.
Somehow, Elon Musk has managed to take the wind out of a good quarter that hasn’t even happened yet.
We have been working for the last few months to try and get a good grasp on how the market views Tesla as a company and where, as an investment, the company may wind up going over the next few quarters. It has certainly been a unique set of circumstances, with its newly proposed acquisition and the company’s unique ability to consistently burn through large sums of cash.
As an investment, it is a fascinating subject, because ostensibly either the company will be found to be correct and this will be one of the greatest growth stories of our time even from current levels, or the skeptics will be found to be correct, and the stock will likely take a tremendous haircut if the company doesn’t wind up collapsing altogether. Those are two polar opposite scenarios and they are what keeps us fascinated about and trying to figure out the markets perception on the company.
For those that have missed the Bloomberg story on Friday, here is what was reported,
Elon Musk sent an e-mail to employees at Tesla Motors Inc. urging them to cut costs and deliver “every car we possibly can” in a push to show positive cash flow in the third quarter.
The chief executive officer of the electric-car company said it would be his last chance to show improved financial numbers before he tries to raise more money. The third quarter is crucial to Tesla’s future because the company is trying to acquire SolarCity Corp. and preparing to roll out the Model 3, its lower-priced sedan, late next year.
“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.'” Musk wrote in an Aug. 29 e-mail obtained by Bloomberg on Friday. “That would be amazing!”
In addition, Musk presses his employees to cut costs, but just for the next four and a half weeks, when the quarter ends and cash can be raised on the reported results,
The e-mail says that Tesla is “on the razor’s edge of achieving a good Q3, but it requires building and delivering every car we possibly can, while simultaneously trimming any cost that isn’t critical, at least for the next 4.5 weeks.”
While it is nice to see Musk trying to rally the troops into a crucial quarter and, of course, prior to a capital raise for the company, this article left a bad taste in our mouths for a couple reasons. We will discuss them, and then we will discuss the few potential positives.
The negative effects of this email being public are almost obvious.
In the email, Musk is pleading with his employees to do every single possible thing that they can do in order to cut costs. The tone of the email borders on desperate, and one could easily interpret the email as suggesting that employees cut corners instead of cutting costs. That suggestion, whether it is true or not, is the last thing that the company needs given recent controversies about the quality of its vehicles.
The email would also have a profoundly negative effect if Tesla does wind up having a good third quarter. If the company is able to show that it is cash flow positive and it is able to post good third-quarter numbers, the market is now going to believe that this was only possible as a one time exception because Musk has been riding his company and his employees to operate in a bare-bones fashion.
The fact is that the company needs to be consistently cash flow positive and consistently profitable down the line, not only in the quarters prior to capital raises. Musk has managed to take the wind out of the sails of a good quarter that hasn’t even happened yet.
The email also seems to suggest that the company may be having trouble raising capital on terms that they are happy with. If true believers want to fund the company at this point, surely they should have the vision to understand that these are necessary high expense years while the company lays the groundwork for a profitable future, right? Why would a reasonable financier be so focused on whether or not the company can be cash flow positive this early on in its lifecycle?
The positives are that the email seems to suggest that the company is in fact on the precipice of having a good quarter. It is nice to try and see a CEO unite his company and share a vision with them and it is obviously important for us to know that Musk knows that cash flow positive is the most important thing that the company can focus on to show the market it means business.
Musk concluded his e-mail by saying,
“It would be awesome to throw a pie in the face of all naysayers on Wall Street who keep insisting that Tesla will always be a money loser!”
With that said, rallying the troops around sticking it to the critics is a little “on the edge”, but we would probably be frustrated if we were the CEO of Tesla as well.
All in all, we believe this email released to be a net negative for the company and a net negative that could potentially take the wind out of the sails of an upcoming “good” quarter for the company. It’s another brick in the wall for Tesla, which we believe is not starting off Q4 in a favorable fashion.
Disclosure: I am/we are short TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.