Tesla's Liquidity Is Largely Illusory (NASDAQ:TSLA) (2024)

Delaware Court to Musk: We’ll Protect You from that Danger You Say Is Non-Existent

How’s this for ironic?

On March 13, to protect both court personnel and the litigants from exposure to COVID-19, and acting in what he described as “an abundance of caution,” the Delaware Vice Chancellor Joseph Slights postponed Elon Musk’s trial arising out of Tesla’s (NASDAQ:TSLA) 2016 acquisition of SolarCity. The trial had been scheduled to begin on March 16.

Delaware Governor John Carney declared a state of emergency on Thursday [March 12] and advised against holding non-essential gatherings of 100 people or more.

“We are expecting that more than 100 people may well gather in connection with this trial,” Slights said, adding that lawyers and witnesses will be coming from all over the country. “And while I certainly would not characterize this trial, or any other trial, as ‘non-essential,’ it is not expedited and no irreparable harm will flow from an adjournment.”

Three days later, on the very day Musk’s trial was to begin, the Health Officers in six California counties, including Alameda County where Tesla’s Fremont factory is located, ordered all residents to stay home unless engaged in “essential activities” at an “essential business.”

Tesla, in effect, defied the order. In the words of a stinging editorial in the Los Angeles Times:

Tesla responded by declaring its manufacturing plant in Fremont “essential” and instructing workers to come into the plant if they felt healthy; if they were sick, well, they could use whatever paid time off they’d accumulated.

Later, Tesla agreed to temporarily suspend its auto production, but only starting on Monday, March 23 – a full week after the order issued. Again, the Los Angeles Times:

That attitude is frankly both unacceptable and dangerous; a privileged employer thumbed its nose at legal mandates designed to protect public health, and apparently did so with impunity. It is outrageous that the company, like the flocks of oblivious beach-goers and pub-crawlers in Florida, would put its own interests ahead of everyone else’s. And “everyone else” in this case includes Tesla’s own employees, many of whom took to social media this week to say how disturbed they were to be forced to do something they believed to be unsafe for themselves and their families.

The privileged employer’s CEO has thumbed his nose at other rules, as well. On March 16, Twitter announced it would require posters to remove tweets that, among other things, deny established facts about COVID-19 transmission. Three days later, Elon Musk, who has more than 32 million Twitter followers, tweeted this:

How did Twitter respond? As Ryan Mac at buzzfeed news detailed, by doing nothing and refusing to explain why:

A Twitter spokesperson declined to explain the company’s decision on Musk’s tweet beyond saying it wasn’t a violation. Musk is one of Twitter’s most popular users, with more than 32 million followers. Twitter CEO Jack Dorsey has cited Musk as one of his favorite people on the platform and invited the Tesla chief to speak at a Twitter all-hands meeting earlier this year.

(Does it appear to you, as it does to me, that Ryan Mac explained why Twitter declined to explain?)

Tesla’s Q1 Deliveries: Brace for Impact

In its Q4 earnings release, Tesla stated that 2020 deliveries “should comfortably exceed” 500,000 units.” Tesla has not revised that guidance.

The 500,000 figure works out to 125,000 per quarter. While that rate is certainly feasible, especially with two factories, those tracking output at Fremont and Shanghai believe Q1’s production will be closer to 100,000.

Assuming the trackers have correctly gauged production, how many of those 100,000 vehicles will Tesla, which claims to be supply-constrained, deliver?

One of the most careful watchers of Tesla delivery data is Twitter's @TroyTeslike. Earlier this month, Troy estimated 98,500 deliveries in Q1, which was a slight increase over the estimate he made in February. In other words, Troy foresaw a delivery number close to what I regard as the likely production number.

Troy promised he would update his estimate by month-end. I'm guessing he will revise downward, if only because the coronavirus complicates Tesla's typical quarter-end delivery blitz.

But if he revises downward by only a few thousand, it won't be enough. I have had several detailed discussions with members of so-called TSLAQ who track shipments to Europe and study registration data in various U.S. states and foreign countries. Their delivery estimates range from 60,000 to 70,000. That is well below the so-called "consensus", which is much closer to Troy's number.

My own estimate is 75,000, a number that seems impossibly low to me, perhaps illustrating what Daniel Kahneman has labeled the “anchoring bias.” The largest variances between Troy’s estimate and my own occur in the U.S. and Europe.

In Europe, we have real time numbers for Norway, Spain, and the Netherlands, which are compiled here by Twitter’s Alex_T (thank you, Alex!). Alex’s graph shows Tesla’s Q1 delivery progress through Day 81, compared to the Q4 progress:

The poor Q1 results cannot be chalked up solely to the coronavirus. The simple fact is that in Europe, competition is starting to bite hard into Tesla’s EV market share. Indeed, as of this same Day 81, Audi alone has delivered 4,607 EVs in Norway – far more than Tesla’s 2,572.

Here is more detail, isolating Norway, with the March 2020 results reflecting registrations through this weekend:

Yes, Norway is not all of Europe. But it has traditionally been Tesla's largest European market, and its car buyers enjoy an exemption on the 25% VAT paid by buyers of internal combustion vehicles.

The pattern of declining Tesla sales, in combination with the ascent of Tesla's competitors, powerfully illustrates that Tesla is no longer king of the EV hill in Europe.

Tesla bulls have been counting on the immense EV tax breaks in the United Kingdom to help Tesla pull out a strong quarter. Seeking Alpha’s jaberwock recently published a superb explanation of those tax breaks. He also looked at the competitive landscape, which features both opportunities and risks for Tesla. He detailed some of what he called “amazing deals” being offered in the Model 3’s price range, including an Audi e-tron lease deal at a significantly lower monthly payment than anything offered by Tesla.

It’s clear that this year in the United Kingdom and, indeed, throughout the European market, the other OEMs are determined to tenaciously compete with Tesla. (In another superb piece published last fall, jaberwock presciently explained why Tesla would have the European EV market mostly to itself in 2019, and why 2020 would be an altogether different story.)

Most of the EV competition is focused on Europe, leaving Tesla largely unmolested in the U.S. Here, though, much of the demand was pulled forward in Q4 by the expiring federal income tax credit, and all indications are that the Q1 numbers are weak.

Lower deliveries will translate to cash burn in Q1. Which brings us to our main topic: what is Tesla’s cash situation?

Q1: Record Cash, and Record Cash Burn

On Thursday, Tesla issued an 8-K announcing an upcoming "orderly shutdown" of the Fremont factory. The 8-K concluded with this statement:

Our cash position at the end of Q4 2019 was $6.3B before our recent $2.3B capital raise. We believe this level of liquidity is sufficient to successfully navigate an extended period of uncertainty. At the end of Q4 2019, we had available credit lines worth approximately $3B including working capital lines for all regions as well as financing for the expansion of our Shanghai factory.

The cash and credit lines add up to pro forma liquidity of $11.6 billion. But, dig a bit deeper, as @Badger24 has done in a recent Twitter thread, and the liquidity is less formidable. (Badger's profile describes him as a "tree-huggin, peace-lovin, pot-smokin hippie" though in real life, he has enjoyed a long and successful career in finance, with significant experience in distressed debt.)

How Much Cash?

Start with the $6.3 billion cash balance at the end of Q4. Badger immediately noticed that $1.3 billion of that cash was held by foreign subsidiaries. Because most of Tesla's expenditures occur in the U.S., and because it's often difficult to repatriate cash trapped in foreign subsidiaries, "astute investors will look only at domestic cash when evaluating a company’s liquidity."

Badger also noticed that another $106 million of the year-end cash resided in inaccessibly in VIEs.

Deduct the $1.3 billion in foreign subsidiaries and the $100 million in VIEs, and the year-end cash balance shrinks by $1.4 billion, to $4.9 billion. Add the recent capital raise and the total cash available is closer to $7.2 billion. That's a lot of cash, to be sure, but it's $1.4 billion less than the $8.6 billion figure suggested by the 8-K.

How Much Credit?

What about the $3 billion in credit lines? Half of that is available only from Chinese banks, for Chinese construction and working capital. Those funds also cannot be repatriated to the U.S.

Another $1 billion is a warehouse line, used by Tesla to finance its direct new vehicle leases until those leases can be packaged and sold into an asset-backed security structure. I tangled with Badger a bit about the warehouse line. I at first thought it should be included in the liquidity analysis. He contended the line should not be added to total liquidity because it merely converts a lease transaction into, in effect, a sales transaction. Without the warehouse line, Tesla would likely exit leasing. As Badger put it,

The warehouse lines support Tesla's business model; it is not incremental liquidity. Think of it this way. The only way Tesla gets cash under the warehouse line is if it spends money building a vehicle and then leases it. No lease and that vehicle doesn't exist and its costs never hit the income & cash flow statements.

To be clear, this is how the distressed community views leasing warehouse lines. It's not my novel interpretation. It makes sense when you think through the transaction.

I was persuaded.

That leaves, as a credit source that can be tapped as working capital credit, the $500 million available under the so-called Asset-Backed Loan Agreement (or ABL), a $2.425 billion revolving credit line supplied by a syndicate of banks.

While that $500 million is certainly handy to have, it is much less than the $3 billion of working capital that a casual reading of the 8-K might suggest (“$3B including working capital lines,” if not parsed carefully, could be misinterpreted to mean the entire $3B is in working capital lines).

The Required Cash Cushion

So, our tally to this point: $7.2 billion in cash plus $500 million on the ABL line adds up to $7.7 billion of total liquidity.

However, a final point Badger makes is that Tesla cannot allow its cash balance to go to zero; rather, it would need approximately $2 billion on hand simply to effect a successful restructuring. In other words, once Tesla burns through $5.7 billion, it must either tap the capital markets again or do something more drastic. Consequently, our $7.7 of actual pro forma liquidity shrinks to $5.7 billion.

$5.7 billion is a stout amount, especially by Tesla’s historical standards. However, it is only half so stout as the $11.6 billion suggested by the 8-K.

The Coming Cash Burn

The question becomes: in view of what Tesla now faces, is $5.7 billion of liquidity stout enough? That depends, of course, on the cash burn in Q1 and thereafter. For several reasons, the burn is likely to be fierce.

First, and most obviously, the dramatically lower deliveries will also result in cash costs that exceed cash revenues. Adding fuel to the cash burn fire will be the surge in the U.S. Dollar, whose effects Bill Maurer recently detailed. It is impossible to guess the total cash burn from operations, but a number in the range of $500 million is not inconceivable. On top of that, Tesla will be making significant capital expenditures.

Second, as the 10-K reflects, Tesla ended Q4 with $3.77 billion in accounts payable. Tesla has been able to steadily increase it’s A/P balance over time as its purchases from vendors increased. That will reverse in Q1 when the shrinking delivery number will force Tesla to repay more trade credit than it incurs. It’s entirely possible the A/P balance could shrink by as much as $2 billion.

Badger believes the Q1 cash burn could be anywhere between $1 billion and $3 billion. That’s obviously a wide range. Even if the COV-19 issues are soon solved, Tesla (like all auto manufacturers, and firms in many other industries as well) faces a challenging Q2. Unless the recovery is miraculously sudden, the financial damage already done is going to result in higher unemployment, shrunken portfolios, and more reluctance among would-be Tesla buyers to commit to a purchase.

Now, ask what happens if the COV-19 crisis persists into Q2. If we are merely at the beginning of, in Tesla's words, "an extended period of uncertainty"?

It is quite possible that in Q2, Tesla would experience an even greater cash burn than in Q1. As Badger says, an extended shutdown could result in Tesla quickly burning through $5.7 billion of cash, leading to what he calls an "existential crisis."

It's only an existential crisis, of course, if Tesla is unable to again tap the capital markets. It has always been able to do so before, and I can't yet bring myself to believe it won’t be able to do so again.

However, the next time Tesla needs capital, the offering price won’t be $767, or anything approaching that number. It might well be closer to one-tenth that number.

What about SpaceX?

What if Elon Musk's biggest cash need, even in the face of the collapsing demand and COV-19 obstacles, isn't Tesla?

SpaceX isn't my forte, but there are others who watch it much more closely.

The Narrative

As I write this on March 22, Tesla’s share price ended the week at $427.53. While this is shockingly lower than the $767 at which new investors purchased Tesla shares in the follow-on offering last month, it is shockingly higher than Tesla’s fundamentals would dictate.

The share price remains completely detached from reality. Fundamentals still do not matter. The shaping of The Narrative remains more powerful.

Here’s an example. I recently wrote about how Tesla has fleeced New York State with the Riverbend Agreement. New York State spent $959 million on a new factory and equipment. Tesla’s subsidiary promised a large number of high-tech jobs.

The high-paying, high-tech jobs quietly shrunk to minimum wage jobs staffed with the help of temp agencies. It’s doubtful Tesla has met even the reduced jobs threshold, but we may never know because New York State seems reluctant to conduct a meaningful audit. Doing so might put the politicians in the uncomfortable position of acknowledging they made a terrible deal. (By the way, and I hope this doesn’t shock you, but Empire State Development has never responded to a single one of the questions I posed in the March 12 article.)

Last week, Elon Musk – having since January insisted COVID-19 is no more harmful than the common cold, and that the panic is real but the medical risk is not, and having refused to shut down the Fremont factory in the face of governmental orders to do so – offered on Twitter to manufacture ventilators to help out with the imminent shortage.

Was this a serious offer? Could Tesla or SpaceX have manufactured ventilators before 2020 ended, and done so without disrupting the supply chain of existing ventilator manufacturers?

The answers are No, No, and No, as just a few phone calls by a journalist at mashable.com illuminated (and I encourage you to read the whole thing).

Dräger wasn't the only ventilator manufacturer seemingly unimpressed with Musk's claims. Medtronic, a global medical device company operating in over 150 countries, has long manufactured ventilators. When asked whether or not the Tesla CEO could reasonably produce ventilators, Medtronic spokesperson John Jordan cautioned that it takes more than just a technically proficient team and the desire.

"Ventilator manufacturing is a complex process that relies on a skilled workforce, a global supply chain and a rigorous regulatory regime to ensure patient safety," he wrote over email.

But, as is so often the case with Musk and Tesla, the facts were left far behind The Narrative. Before you could blink, Elon Musk was engaged in a Twitter discussion with the famed political analyst, Nate Silver, and that was soon followed by a plea from New York City's mayor.

Within hours, headlines announcing the Mayor of New York was seeking Elon Musk’s help in manufacturing much-needed ventilators were published all over the internet (for instance, here, here, and here). (All of the stories, naturally, evincing complete credulity about the claim.)

It was all as if the Mayor of New York City was utterly unaware about how Tesla had already taken his state to the cleaners for almost $1 billion. And was unaware that Musk has been insisting COV-19 is no more harmful than the common cold, and has been pushing back hard against the California order that he close the Fremont factory.

The facts -- that Musk views COV-19 as medically harmless, and has spread misinformation that children are immune, and has emphatically resisted taking steps to protect his employees -- were completely swallowed up by The Narrative, which portrays Musk as a savior of humanity.

Is it too much to hope that, some day, Mayor de Blasio and Nate Silver might fruitfully review Elon Musk’s history of broken promises? Yes, I suppose it is. But just in case they want some illuminating resources, an excellent list has been compiled by Seeking Alpha’s Bill Maurer. And another by Twitter’s Ted Stein.

On Friday, a day after the ventilator stories first appeared, a friend told me his mother had just raved to him about that wonderful man, Elon Musk, who is manufacturing ventilators for New York City.

Then, on Sunday (as I write this):

(I hope none of you has forgotten my thoughts three years back about the striking similarities between our Nation's CEO and Tesla's CEO.)

That, my friends, is an example of The Narrative. There is no greater master of building The Narrative than Elon Musk.

(Win McNamee, Getty Images)

Until the facts begin to make headway against The Narrative, Tesla remains a dangerous trade on the short side.

That said, the coming Q1 delivery numbers make it an even more dangerous trade on the long side. And an even more dangerous trade once the Q1 financial results finally arrive (and I anticipate the SEC may permit late filing, and have no doubt Tesla would take advantage of that).

A Note About COV-19

As I have written before, I am not an epidemiologist, and have no education, training, or experience that would enable me to offer an informed opinion about COV-19.

I read thoughtful analyses by people who urge that we are not acting with enough vigor in enacting and enforcing workplace shutdowns and social distancing, and I read other thoughtful analyses by people contending that the financial harm from such measures is going to be more societally devastating than the harm from the disease.

I see cogency in both arguments. I earnestly hope a cure or vaccine can be developed quickly enough that we will not need to see which viewpoint was correct.

And, A Word of Thanks

As always, I stood on the shoulders of giants in tapping this out. Obviously, I took instruction from Badger and others I've identified in the article. Also indispensable was guidance from Twitter's Joey Freshwater and Luis Carruthers.

My deep thanks to all of them, with the stipulation that they are not responsible for any of my errors.

Troy Teslike Update, March 22, 4:17 pm

Unbeknownst to me, Troy Teslike had updated his Q1 delivery estimate after I prepared my first draft of this article. Here are his revised numbers:

I always pay close attention to Troy because he is data-driven and has endless integrity.

Montana Skeptic