“This Is Hardcore”: Elon Musk Confronts the “Bear Case”

Entertainment USA

Don’t say “death spiral,” but Tesla has unquestionably entered a perilous new era. Last September, a month after Elon Musk’s notorious “funding secured” tweet, I wrote a New York Times opinion piece about the fact that the real problem at Tesla, Musk’s electric-car company, was not necessarily Musk’s irresponsible, and perhaps illegal, behavior as C.E.O. Rather, it was the Tesla balance sheet, which was larded with $11 billion in debt, some $1.7 billion of which needed to be paid off before November 2019.

Debt isn’t necessarily a bad thing. But when a company doesn’t have the operating earnings to service that debt, a single dollar of debt can be too much. And then it becomes more like a Ponzi scheme, which, to be honest, Tesla is increasingly resembling. Can Tesla convince investors to give it enough new capital to pay off the maturing debt before the world concludes that the company doesn’t have the resources to meet its obligations as they become due? That, of course, is the textbook definition of a bankrupt company.

When I last wrote about Tesla, the company’s stock was trading at $300 per share, giving Tesla a market capitalization of around $51 billion. Nowadays, Tesla’s stock is trading around $190 per share and the company is valued at around $34 billion. That’s a loss of a cool $17 billion for equity investors, in eight months. In November, Tesla repaid $230 million of convertible debt with some of its cash pile instead of converting the debt to equity because its stock price was well below the conversion price. In March, Tesla paid off another $920 million in convertible notes in cash, again because its stock price was below the conversion price. At the end of the first quarter, Tesla’s debt had been reduced to $10.3 billion, from $11 billion, but its cash balance fell by $1.5 billion, to $2.2 billion, from $3.7 billion three months earlier.

Faced with another $566 million convertible debt payment due in November and a dwindling cash pile, two weeks ago Musk hit the capital markets. Once again, he worked his magic. Underwritten by Goldman Sachs, Tesla had a blowout offering. Musk raised a new $2.7 billion in cash, comprised of $847.6 million raised by selling stock at a price of $243 per share and another $1.84 billion raised by selling new five-year convertible notes. Tesla said it intended to use the $2.7 billion to build its cash reserves up to $4.3 billion.

It’s been pretty much downhill for Tesla since the offering closed on May 7. The stock, which was at $247 per share on the day of the offerings, is now at $195 per share, a collapse of more than 20 percent in just over two weeks. That means whoever bought the stock on the offering at $243 per share is licking his wounds. Meanwhile, investor concern about the probability of Tesla defaulting on its billions in debt has once again skyrocketed, with the price of insuring against a default on the debt hitting the all-time-high levels, last seen in September. Its tranche of bonds, maturing in 2025, is now yielding close to 9 percent, some 680 basis points more than the yield on the five-year Treasury.

How did Musk once again hoodwink investors? Part of it, as always, has to do with the Wall Street underwriting hype machine—the same hype machine that touted the initial public offerings of both Lyft and Uber, before both fell rapidly below their I.P.O. prices, once again burning the retail investors who get suckered every time. Then there are self-inflicted wounds, courtesy of Musk himself. This time one came in the form of a leaked e-mail, in which he said—despite giving the impression during the fund-raising process that the new capital would put the company on sound financial footing—that henceforth his new chief financial officer would review every cash payment “no matter how small” and that he himself would also review nearly every expenditure. He wrote that Tesla’s cash pile of $2.4 billion at the end of the first quarter would only give the company another 10 months at the first-quarter “burn rate”—thus the need for rigorous cash management. “This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable,” he wrote.

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