Recently, Tesla Inc. (NASDAQ:TSLA) conducted an hours-long investor day. The event came two days before Tesla reported first-quarter earnings. Elon Musk, one of the greatest showman since P.T. Barnum, used the event to detract from the fact that Tesla as has yet to deliver any real shareholder value – nothing in the way of dividends, share buybacks or free cash flow that can be invested for the future.
The latest shining object to be dangled by Musk to divert investor attention away from the company’s short-term struggles is his new ambition for autonomous robo-taxis – one million to be delivered as early as next year. The announcement was met by eye rolls from anxious investors, who are still waiting on the promise of a cash-flow positive quarter, which now has to wait for another year.
Just Another Broken Promise?
It’s a road well-traveled by Tesla investors, captivated by Musk’s soaring rhetoric and grandiose visions, who have suffered through several delays and disappointments. First, it was the promise of producing a mass-market version of its Model 3 sedan. Not only has Tesla yet to deliver on that promise, but the company has also been burning through cash in its efforts to do so. Then there’s the Model X sport utility. Musk had to admit that his ambitions for the highly anticipated sport utility outpaced the company’s development and manufacturing capabilities.
Having promised shareholders the company would be cash-flow positive in the second quarter this year, Musk will continue the cash burn as he pursues his latest ambition of an autonomous robo-taxi fleet. While dangling that shiny object in front of shareholders, he deftly lowered their expectations with a target of becoming cash-flow neutral when the robo-taxis start to roll off the line. He now expects that, once the robo-taxi fleet is active, the company to be “extremely cash-flow positive.”
Are Investors Catching On?
After another delay and more sleight of hand, investors are expected to continue to drink the Kool-Aid and marvel at Musk’s genius as he pioneers a new path of disruption. Except, this time investors are not biting. In the days following the venture announcement and its first-quarter earnings report, Tesla’s shares slid another 11%, and are down 28% on the year. Tesla reported a $702 million loss on lower revenues– the company’s fourth worst quarterly loss since it went public in 2010.
While Musk’s business model – to become a high-quality, low-cost manufacturer of high-end electric vehicles – has come into question, this new venture doesn’t even have a business model. As tantalizing as the new venture sounds, the best that Wall Street could say was that the idea “seemed half baked,” with analysts noting that the technology is “still far from ready and puts Tesla in a risky position to compete with leaders in ride-hailing and software industries.”
Elon Musk’s Dream Could be Your Worst Nightmare
No one can deny that Musk, who is as bright, ambitious and visionary as they come, has the ability to create disruptive technologies; and Tesla’s cars are setting new standards for quality and buyer loyalty. It’s why Musk has never had any trouble raising capital for his venture. But, at some point, the company has to show it can make money.
With losses mounting and debt maturities creeping closer, the clock is ticking on Tesla, which needs to get to cash-flow positive in a hurry or find other ways to finance its operations. It could issue more debt. However, due to slowing sales, its debt yields are rising and, unless the company can prove it can make money, the markets may be skeptical about funding its growing debt load. Or, Tesla can simply issue more stock, which would dilute current shareholder value. Neither option is appealing for shareholders or the company. Yet, it would allow Elon’s dream to live another day.
From a practical standpoint, investors must be able to understand the difference between a great story and a great business. Tesla’s inability to get to cash-flow positive after so many years and missed promises should raise red flags, questioning the sustainability of Tesla’s business model and its viability as an investment.
Elon Musk may be a genius, but he is also a showman. Eventually, a business run by a showman turns into a circus. The critical question is whether Musk is in it purely for your entertainment or as a steward of your investment. There are hundreds of great companies, run by strong management teams whose sole purpose is to drive shareholder value. There’s no need to be wasting your time with this circus act.
