Elon Musk baffled both friends and foes alike on the most recent Tesla Inc (NASDAQ:TSLA) earnings conference call. Musk seemed to be under stress, giving odd answers at several points during the call.
Things turned from bad to worse when Musk refused questions from two professional analysts. He rejected “boring” questions and handed over the majority of the rest of the call to a Telsa fan on YouTube.
TSLA stock dropped as much as $20/share following that fateful conference call. For the first time, it seems that Tesla’s bad news is sticking to the company. Analysts dinged Tesla for Musk’s immature performance, and the credit market is starting to get jittery.
I warned several weeks ago that Tesla was a “sinking ship,” and subsequent developments confirm that point. The earnings report wasn’t good, and Musk’s conference call behavior, along with his increasingly bizarre Twitter feed, should raise further concern.
Some analysts have gone so far as to compare Musk’s recent behavior to Enron’s former CEO Jeff Skilling, who cursed out an analyst on a conference call shortly before that company failed. The comparison is harsh. Regardless, TSLA stock holders should be nervous here.
TSLA: Fear Is Spreading
TSLA stock bulls have developed a sense of immunity over the years. Regardless of what sort of bad news that would hit Tesla, the stock always recovered. Whether it was SolarCity collapsing or Tesla constantly losing more money than expected or inundating the market with secondary offerings left and right, TSLA stock would bounce back.
Now, however, Tesla is getting into a more difficult situation. You see, now Tesla doesn’t just have common stockholders. The company has taken on debt. Unlike stockholders, who have given Elon Musk the benefit of the doubt, creditors tend to demand that actual financial metrics such as revenues and profits meet expectations.
Moody’s Corporation (NYSE:MCO), a credit rating agency, cut its Tesla debt rating further into junk territory last week following the latest developments.
It isn’t just Moody’s, either; the creditors are getting antsy. Tesla issued 5.3%-yielding bonds just last year. Already, those 100 par bonds have plummeted to 87 cents on the dollar (a decline that has accelerated over the past month).
That results in Tesla’s bonds, sold to the public at 5.3%, now yielding 7.5%. That’s a substantial and worrisome decline in Tesla’s creditworthiness within the space of a year.
Additionally, the credit default swap “CDS” market is showing concern about Tesla. The price to buy CDS protection against a potential Tesla default has surged in recent weeks. The five-year CDS for Tesla in particular is now up to implying a ~40% chance of default over the next five years.
And, to be honest, that’s probably fair. If the company doesn’t hit profitability during the Model 3 surge, it will be years until the company has something else to stem its constant cash flow burn.
Elon Musk Isn’t the Donald Trump of Cars
Is Elon Musk the Donald Trump of the investing world? TSLA stock bulls will say that Musk is using the same maverick style that Trump used to ascend to the presidency. Elon Musk is talking trash to his critics on Twitter, continues to baffle fact-checkers, and frequently overpromises and then fails to deliver. Given the current occupant of the White House, what’s wrong with that?
Well, for one thing, business isn’t politics. In politics, you win from earning support from enough voters. In other words, you have to have the best story or appeal to the masses.
That’s not the case with business. In making cars, Elon Musk can’t just throw the best jabs on Twitter. He has to position his company to sell enough cars at a high enough profit margin to repay Tesla’s debtors and hopefully turn a profit.
This is demonstrably not happening, at least not yet. Adjusting for the change in accounting treatment this quarter, Tesla’s revenues actually declined year-over-year. So much for the much-hyped production ramp.
The company is continuing to lose more than $700 million a quarter. Elon Musk claims Tesla will get to profitability later this year, but he’s said similar things in the past, and it hasn’t turned into real results.
As early as 2012, Musk said Tesla wouldn’t need to raise more capital because it was reaching self-sufficiency. Here we are six years later, and Tesla keeps blowing through investors’ hard-earned cash.
TSLA Stock: Get Out While You Can
Simply put, Tesla’s valuation is way too high given the multitude of problems it faces. TSLA stock still has a higher market cap than Ford Motor Company (NYSE:F). This is insane. Ford makes more EBITDA per year than Tesla generates in revenues.
TSLA stock has long been wildly overvalued. What’s the difference now? Simple. Elon Musk is losing his credibility more and more with every passing day. As long as Tesla continues losing $2 billion or more per year, it needs more capital from investors. Tell analysts to get lost, and it gets much harder to tap into Wall Street’s funds going forward.
As Tesla’s failures pile up, Musk is running out of time to convince both analysts and investors that he knows how to run a gigantic business. Tesla has always been a story stock. You need to believe in Elon Musk’s vision if you are going to own TSLA stock and sleep well at night. Now, instead, the story is breaking down.
Tesla is failing to deliver Model 3s in a timely fashion, its self-driving promises to its customers have gone painfully unfulfilled, and now the company’s CEO is creating resentment with the very investors who need to keep funding Tesla’s future capital expenditures. This story is getting ugly. For all but the most risk-seeking speculators, TSLA stock is a clear avoid at this point.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Tw