Tesla: positive spin
Disaster remains our bet but there is a path for the carmaker to succeed in 2018
We think 2018 is when Tesla’s wheels should come off. With the make-or-break Model 3 missing milestones, investors will tire of providing cash for dubious debt and equity. Even if deliveries of the delayed car step up, it is too late: rival carmakers are about to clog the roads with new electric cars.
But unlike the myriad short sellers, we hope to be wrong. Public companies can appear to be on the path to extinction, with half disappearing in the past two decades. Elon Musk shows that public markets do not have to be hostile: Tesla’s shares are up almost 50 per cent this year in spite of the setbacks to the Model 3. In the seven years since its IPO, investors have fuelled the dream with almost $10bn via equity and convertible bonds.
How then might Tesla justify an enterprise value of $60bn on less than $300m of annual earnings before interest, tax, depreciation and amortisation?
First, the competitive threat may be overstated. Tesla’s Model S was first delivered to customers five years ago. Centuries of combined experience was insufficient to allow established manufacturers to produce a superior electric car. The Nissan Leaf and General Motors’ Chevy Bolt are smaller and cheaper and yet still sell less.
Second, the perennially skint company may soon receive a flood of cash. Model 3’s initial production has been disappointing, with Tesla expected to limp to 1,000 cars this quarter — a tenth of earlier expectations. But Tesla has mastered complicated production before. It has received about 500,000 pre-orders of the Model 3, each of which required a $1,000 deposit. An average selling price may well be more than $50,000. Even if two-fifths of the waiting list demand their deposit back, that still brings in almost $15bn, or double last year’s total revenues. Finally, Tesla should reach a smooth patch of road: strong working capital and positive free cash flow. The doubters, like this column, can eat their words.