Elon Musk’s luxury electric car company Tesla (NASDAQ: TSLA) was hit with a barrage of negative headlines this week: “Tesla is facing a crucible,” said Bloomberg, and Forbes listed “4 Reasons to Sell Tesla Stock.” The Wall Street Journal said on Thursday that “Tesla’s Make-Or-Break Moment is Fast Approaching.” TSLA stock has fallen 10% since February 26.
What’s with all the bearish media activity? A number of disturbing reports have recently come out that, in sum, suggest mounting disarray. Last month Tesla’s president of global sales and service, John McNeill, left to become Lyft’s COO; this week Tesla announced two more departures: Chief Accounting Officer Eric Branderiz left for personal reasons, abandoning nearly $5M in unvested stock options, and Susan Repo, Tesla’s corporate treasurer and vice president of finance, also left the automaker.
“Elon Musk has to be careful to stabilize his company,” said Ferninand Dudenhoeffer, the director of the University of Duisberg-Essen’s Center for Automotive Research. “That doesn’t look very comfortable.”
The churn in Tesla’s upper management couldn’t come at a worse time. The sales chief left in the middle of Tesla’s do-or-die Model 3 product launch, and the departure of senior finance people certainly will not help the EV manufacturer turn its books rightside-up.
Tesla’s troubles don’t end with personnel losses. On Wednesday CNBC reported that Tesla employees told the news service that the company is manufacturing a high ratio of flawed parts and vehicles that need rework and repairs. One current Tesla engineer estimated that 40% of the parts made or received at Tesla’s Fremont plant require rework. A lean manufacturing consultant told CNBC said that Tesla’s high proportion of flawed parts indicated a quality control problem an order of magnitude above that experienced by most carmakers.
Those revelations about persistent quality control came after Tesla shut down Model 3 production for five days, from February 20-4 to “improve automation and systematically address bottlenecks in order to increase production rates.” Tesla, of course, wasn’t forthcoming about the assembly line stoppages until Bloomberg’s Model 3 Tracker, which uses VINs to estimate production, reported that production unexpectedly fell in early March.
Ultimately, though, Tesla’s fortunes don’t depend on specific personalities in its C-suite—we all know Elon Musk is the visionary with star-power—or the quality control issues that fanboys have been willing to overlook. The future of the company comes down to Tesla’s bottom line: the ability to manufacture cars profitably and raise capital affordably. Peter Cohan wrote in Forbes that Tesla’s Altman Z-Score, a metric that measures a corporation’s financial health and probability of entering bankruptcy based on data listed in the 10-K, is at 1.26, its lowest score for any quarter since 2014. Any company with a score lower than 1.8 is considered distressed; a score of 1.0 or lower indicates that bankruptcy is likely within two years.
Tesla destroyed about $1B each quarter in 2017 and was left with $3.4B in cash at year end. At that rate, the company will run out of money in 2018 unless it raises more capital or starts generating positive revenues. Some of Tesla’s biggest investors are losing confidence: Fidelity Investments, the company’s second-biggest stockholder after Musk himself, sold 33% of its shares last year. Nathan Weiss, of Weiss, Harrington & Associates, told the Wall Street Journal that “Some big investors are losing patience. They are less excited about it than they were a year ago.”
According to Morningstar, as of March 15, fully 27% of Tesla’s publicly-traded shares were held by short sellers. But the bond market has reacted with a shrug—Tesla’s 5.30% coupon junk bonds, set to mature in 2025, were trading at yields only about 340 basis points above the benchmark US Treasury yield.
FreightWaves’ chief data scientist and former automotive bond trader Daniel Pickett, CFA, simply remarked, “The only reason to own Tesla bonds is in order to own post-bankruptcy Tesla stock. When Tesla equity is wiped out, bondholders will be issued shares of the re-formed company.”
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