It’s hard to tell exactly what’s going on at the market’s most divisive company, but from what we can tell, it’s probably not great. In this week’s episode of Industry Focus: Energy, host Nick Sciple and Motley Fool analyst John Rosevear update listeners on the current state of Tesla‘s (NASDAQ: TSLA) whirling news carousel, and the many red flags it’s raising. What should investors make of the cash raise? Why did a Chinese ride-hailing company blast Tesla with multiple billboards in Times Square? What’s going on with Model 3 sales numbers? What happens to Tesla if demand for its cars isn’t actually infinite? Why is 40% of the board leaving in the next two years? Any merit to the Autonomy Day announcements? Tune in to find out about these stories and many more.
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This video was recorded on May 2, 2019.
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Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, May 2, and we’re talking Tesla. I’m your host, Nick Sciple, and today I’m joined by Motley Fool senior auto analyst John Rosevear via Skype. How are you doing, John?
John Rosevear: I’m doing well! How are you, Nick?
Sciple: I’m doing great, John! Tesla, one of my favorite companies to follow. To our listeners, full disclosure, I own some long puts on this company I started buying a few months ago. I’ll try to be as objective as possible about this, but just keep that in mind as we talk about it.
John, we talked about Tesla back on March 7. A lot of the things we talked about, today, the stories are still playing out. We talked about price cuts, demand had been slowing down. They had their store closure strategy that, at the time, we questioned, it since has been backed off. We’re seeing where they’re going to manufacture the Model Y, talking about the production guidance, the Musk/SEC case has been resolved. We got Tesla’s Autonomy Day, which gave us some more guidance on autonomy. And, we asked whether Tesla would raise cash. That’s where I want to start off today.
Just this morning, Tesla dropped a prospectus to raise up to $2.3 billion in cash via a sale of convertible bonds and a secondary offering of stocks. The breakdown of that, they’re suggesting they’re going to raise $640 million in net proceeds from selling 2.7 million shares, with Musk buying $10 million of those, and then an additional $1.35 billion in convertible notes due in five years.
John, as you see this filing, it came out this morning, what’s your early reaction?
Rosevear: That they’re plugging a hole here. They had a significant working capital deficit in the first quarter. This will cover it. It won’t cover a whole lot more. It is interesting that, “We’re not going to do a raise, we’re not going to do a raise,” and then this comes out. I go back to something we talked about a lot back on March 7 — there’s a heck of a story unfolding behind the scenes here. Someday, we’ll know what it is. [laughs]
I look at this, you see people on Twitter celebrating. “Yay, now they can fund the Model Y! They can fund the semi! They can fund this and that!” I’m like, no, it’s just going to keep the lights on for a while. Unless something big turns from what happened in the first quarter, this is about keeping the lights on.
Sciple: Yeah. We can go into the first quarter earnings now if we want to. We got those results back a couple of weeks ago. The report left something to be desired. Revenue down 41% from the fourth quarter. The company citing challenges when it came to delivering their vehicles overseas. They said they delivered over half their vehicles in the last 10 days of the quarter, called out some weakness due to seasonality. Obviously, some pull-forward of sales due to the expiration of the U.S. EV tax credit. Issues they’re facing — I think, if you look at the first sentence of their earnings press release, you can see how the environment around this company has changed. You look at Q2 2018. Tesla: “We made significant progress on Model 3 ramp in the second half of Q1. That momentum continued into early Q2.” Q2 2018: “It’s fair to say that no production ramp of any other product has been as closely watched and debated as the Model 3.” Q3 2018: “Q3 2018 was a truly historic quarter for Tesla.” Q4 2018: “Last year was the most pivotal year in Tesla’s history.” Q1 2019, their most recent quarter: “We entered the quarter with $2.2 billion in cash and cash equivalents, a $1.5 billion reduction from 2018.” The story, even the way Tesla is putting it, has gone from a growth story driven by Model 3 ramp to, “We have enough cash to keep the lights on.” That reflects what you said, John.
As you saw this earnings report from Tesla, what really stood out to you? What were the important things that jumped out at you?
Rosevear: They lost a ton of money. [laughs] It’s just the way Musk walked the guidance down over the course of the quarter, and then boom, surprise, it was a big loss. I mean, they’ve made these weak arguments around, “Well, we’re selling tons of cars, we’ve just had trouble delivering them because XYZ.” But it really feels like demand has slipped and that we are now seeing, Tesla is scaled from a manufacturing perspective for maybe more cars than it’s going to be able to sell on a running basis, on an ongoing basis. And in the auto industry, where fixed costs are high, and we can talk all day about how Tesla is not an automaker or whatever, but Tesla right now is mostly an automaker, and their fixed costs are tremendously high, because they’ve scaled for demand that does not appear to be materializing — that raises the cost per car, and that squeezes the margins. We can talk about gross margins all day, but at some point, Tesla needs operating income. [laughs] And they haven’t had any of that to speak of. They certainly didn’t in the first quarter, and then they got clobbered. And now we’re back to talking about burn and a cash raise and so forth. This is an 18-year-old company, and we’re still here. I think that’s my takeaway here.
To step back from that, clearly, watching the stock trades in the last couple of weeks, the story feels like it has changed. The sentiment has changed.
Sciple: Yeah. You say they lost a large amount of money. Just to give you some context, they had lost $4.10 earnings per share vs. the consensus analysts’ estimate of $0.75. Really, a significant miss. And as you mentioned, the analyst response to the company as really seemed to shift. The very first question on the earnings conference was a Goldman analyst, really going right at Tesla. Following the release of the 10-Q, we’ve had some more criticism come out. The headline gross margin on the earnings press release that Tesla put out had a 20.3% gross margin; however, they did not disclose in that press release, not until the 10-Q, that over $200 million of its sales were from these non-zero EV tax credits likely arising from the recent deal that they got leaked that Tesla and partnered with Fiat Chrysler to pool their vehicles sold into Europe to help Fiat avoid some fines. But you had some analysts really getting upset that those weren’t disclosed. If you back out those zero-emission vehicle tax credits, which are really 100% gross margin sales, if you back those out to get to the true automotive margin, you’re getting a 15% gross margin. That’s another 5% bump that analysts were concerned with.
Capex is way behind schedule. They have a range of between $2 [billion] and $2.5 billion for the year. However, in the first quarter, they reported $300 million in capex. That’s 12% of their annual guidance. So that has to really ramp up in the back half of the year. This new capital, it’s just not going to create the cash to support that, John.
Rosevear: Even at a high level here, the story for Tesla for years has been, “Yeah, of course they’re not making money because they’re plowing it all back into the business.” Well, they’ve cut capex to the bone here. [laughs] Where are those clouds going, guys? It’s just not selling enough cars.
Sciple: I’ll say, Tesla has called out and said that there were some issues getting stuff overseas. They think that in the next quarter, as things normalize, they’ll see some more normalized deliveries. They did report that the Model 3 is still the highest-selling luxury vehicle, I believe they called out that it outsold the next-closest car in its category by 60%. So the Model 3 is very popular —
Rosevear: Let’s back up. It’s outselling luxury sedans, but sedan sales are falling across the industry because people are going to the SUV next to it in the showroom. [laughs]
Sciple: Right. And the Model 3, obviously, you can say there’s pull-forward of demand, and there’s been a huge ramp in the back half of the year; however, you can look at Model S and X. These are the vehicles that have been around for a long period of time. They had a 45% sequential decline in growth. Dipped to 12,500 in sales, versus a two-year run rate of 25,000 a quarter. And those are the higher-margin vehicles. Really, some question marks there. We’ll see how things play out.
Obviously, Tesla has maintained their guidance going into the back half of the year. They expect demand to ramp up. That’s something they continue to watch as we move into the second quarter.
Other things that we saw coming out of the 10-Q is, Tesla has begun to qualify some new battery suppliers. In their 10-K on Page 10, they said they qualified only one battery supplier. But if you look at the 10-Q on Page 53, they say they’re qualified a very limited number of battery suppliers. There’s been some reporting over the past few weeks, I think I talked about at the top of the show with Lou Whiteman a few weeks ago, Panasonic has ceased further investment in the Gigafactory. It seems to be that Tesla has been looking for new suppliers. So as you see, some indication that Tesla is reaching out and qualifying new battery suppliers. Elon tweeted that Panasonic had been a constraint on their production since the summer. Maybe a couple of weeks ago, he tweeted that.
So as you see Tesla starting to qualify new battery suppliers, what does that mean for you as an observer of the company? Is that encouraging for Tesla?
Rosevear: What I’m hearing — first of all, we’re mostly hearing one side of the story. Panasonic has let slip some things in the Japanese business press, but they haven’t said a whole lot yet. They report what will be the end of their fiscal year as of March 31 I think next week, I think it’s next Thursday. I suspect we’re going to hear considerably more then about the state of the relationship with Tesla.
One side of it is, yeah, sure, Tesla should maybe be sourcing batteries from multiple sources, like other automakers moving into the electric vehicle space seem to be doing. The other is, dude, they built this ginormous factory in the desert with Panasonic, and it’s not working out, so they’re buying batteries from whoever, like everybody else is. The Gigafactory has been part of the story. “Only Tesla will have enough batteries!” Only Tesla this, only Tesla that. And it sounds like the Gigafactory — I mean, they call everything a Gigafactory now — but THE Gigafactory, the one making gigawatts worth of batteries every year, that this isn’t working out.
Tesla is a company that has a long history of burning relationships with suppliers. I wonder if we’ve finally hit the point where they burned Panasonic. The most famous one is Mobileye, which was supplying key technology for their advanced driver assist system autopilot, which basically walked away after that horrific accident a couple of years ago. And Musk tried to spin that as an advantage and so forth, but to people who were really watching carefully, it was clear what went on here. They’re just hard to work with. The company has never been good at building relationships in the existing automotive supplier ecosphere. And they’re reaching a point where fewer and fewer companies want to do business with them. And Panasonic, which made this huge investment, this very public, very visible investment, seems to be on the verge of walking away. That’s hugely significant.
And yeah, sure, battery cells are becoming commodities, and Tesla will be able to buy them elsewhere. But the Gigafactory was pitched for years as a key part of the strategy, a key part of why Tesla would succeed in this space while traditional automakers failed. And it’s not working out. Again, when you step back a little bit from the details, that’s a big dent in the story.
Sciple: Yeah. If you look back, in 2016, Tesla was also citing issues with battery production as a constraint on their being able to ramp. Given that we’re three years later, and these issues are still presenting themselves… to be fair, Tesla has ramped production of vehicles in a significant way. Obviously, the Model 3 is a much higher-volume vehicle than the S and X ever were. But these are still issues that the company is facing after, like you said, it’s been around for a long period of time. As they start to qualify some new suppliers, maybe that can smooth out some of the issues. They’re not as dependent on Panasonic. But, something to continue to watch. As you mentioned, Panasonic has been a key supplier for Tesla throughout its history. There’s pros and cons here. We’ll just have to see how things play out.
The other thing I wanted to call out is, in the 10-Q, had a little bit of a change in guidance. If you look at the 10-K, Tesla on page 16 of the 10-K had targeted an annualized production rate for the Model 3 of 500,000 vehicles between Q4 2019 and Q2 2020. However, if you look at the most recent 10-Q, there’s a change in language there. Instead of a run rate of 500,000 Model 3s during that period, they’re now calling for a run rate of 500,000 of all vehicles during that period. Is this significant at all for you, John? Or just Tesla realigning guidance with what they’re able to deliver?
Rosevear: It’s Tesla realigning guidance with what they’re able to deliver. The question is, will they find 500,000 buyers in that time period? And that is increasingly a serious question. The assumptions around Tesla have always been that there will be unlimited demand here. We talked about this at length in our last podcast, the whole idea of crossing the chasm from the enthusiast early adopters to the mass market. Signs continue that they haven’t quite managed it. Are they going to find 500,000 buyers?
Traditionally in the auto business, when you set your goals around production and then throw them to the dealers to sell them at whatever price they can sell them, that’s not good for margins. [laughs] Especially going into some economic uncertainty, perhaps. I mean, China’s in a slump right now, at least in terms of auto sales. This could be a set up for a fire sale. We’ve already seen them cutting prices, what, three times this year? Four times this year?
At some point, you’re not selling vehicles at a profit at all. I think they’ve already narrowed their margins considerably. No matter what they’ve painted for a gross margin in the first quarter report, real world, when we start to look at operating margins, it’s getting worse, not better. I think by continuing to target production targets while just assuming the demand is unlimited, they’re walking into a trap here.
Sciple: Right. For companies like this, you talk about the idea of operating leverage. Operating leverage works both ways. As you scale and demand continues to increase, then you can grow your margins. But if demand begins to collapse, it starts working against you.
Rosevear: And in the auto industry, where the fixed costs are so high, it starts working against you quickly, even at what might sound like a good annual total number of sales. If you’ve scaled for a lot more, you’re in trouble.
Sciple: Yeah. So, again, something to watch with this company. Last thing I want to mention when it comes to change in language from the 10-K to the 10-Q revolves around compliance with financial and debt covenants. On the 10-K page 109, Tesla says, “As of Dec. 31, 2018, we’re in compliance with all financial debt covenants.” In the 10-Q on page 22, however, the language has changed to, they are in material compliance with all financial debt covenants. Again, John, is this significant? How should we look at this change in language? Or is it just a nothing burger?
Rosevear: I was in a lively debate on Twitter over whether this was significant or not. The answer is, we don’t know. It may be that one of their debt holders is willing to hand-wave over some peripheral evidence of non-compliance, and they said, “You know what, we’re not going to worry about it, because we want to maintain our place in line here if and when things go kablooey. We don’t want to force things because we’re still hoping to get paid 100%.” Or, it may be, I still sit with the possibility that there’s a new associate at the law firm, [laughs] and they had responsibility for this section, so they edited it a little bit. I don’t know. We don’t know if it’s a material change to add the word material before the word compliance.
We don’t know if it’s a material change. It seems possible that, again, there’s a story behind the scenes, but I don’t know whether it’s a big story or a small story.
Sciple: Yeah. Again, something to continue to watch. Obviously, the numbers reported in this quarter indicate some strain on the company that’ll continue to play out. We’ll see how things go. To Tesla’s credit, they are saying that as they overcome these issues, shipping vehicles overseas, things will smooth out and the trajectory should start moving up and to the right. We’ll have to see until the next quarter to see how that plays out. But something to continue to watch.
Again, that same week, that earnings report, I want to move on to Tesla’s Autonomy Day now and discuss a little bit what’s going on with Tesla from an autonomous point of view. Tesla had an Autonomy Day the Monday before they reported earnings. Monday, they had the Autonomy Day, and then Wednesday, they reported earnings. Really, the Autonomy Day seemed to be something that really is like, “The future of our company is bright. Don’t worry about these near-term issues. We have really big opportunities.” I want to talk about what they revealed during that presentation and get your reaction as someone who’s really been following the auto industry for a long time, has really studied up on autonomy to try to be as knowledgeable as you can. So, we’ll go through one by one.
The first thing Tesla rolled out, it was really quite impressive, they revealed their new self-driving chip. They said it’s going to be capable of processing 2,300 images per second, 21 times better than the processor they currently use, designed by former Apple engineer Pete Bannon, who now works at Tesla. Musk called it objectively the best chip in the world. As you look at what they revealed, what should investors know about this chip and what it means for Tesla?
Rosevear: I don’t know. [laughs] It uses less power than the NVIDIA equivalent. The Nvidia equivalent has more computing power. There’s an Intel mobilized solution coming that we haven’t quite seen yet. We don’t know how that’s going to fit into this, the next generation into Mobileye’s solution. I don’t know.
Again, to set back to a higher level, I don’t know how to take any of this. [laughs] We have people like this, boutique shop Arc Investments, who’s out on Twitter saying, these guys are four years ahead of everybody else, because we have analysts to tell us so; and then, people who have spent a lot of time watching the state of autonomous vehicle development across multiple companies saying Tesla is not really in the game at this point. I don’t know what to make of it. I really don’t. Engineers seem to think, OK, if it delivers, it’s legit, it’s a contender. We don’t know.
Sciple: Yeah, that’s real question. The whole story around Tesla when it comes to autonomy has really been just two opposite poles. You have one group that says, “Tesla’s so far ahead, that they can’t help but go against the consensus; they’re so far ahead that no one else can understand how they’re doing.” Then you have this other side of the market that seems to be suggesting that they’re full of it. That chasm was really not closed by this Autonomy Day. I think people saw what they wanted to see in this reporting.
Going back to the chip, the question marks some people have had is, is computing power the bottleneck that’s keeping self-driving from starting? The criticism of Tesla’s self-driving hasn’t arisen from their computing power as much as it’s arisen from whether their current sensor suite is capable of the type of data observation needed to achieve reliable self-driving. I want to talk about their strategy a little bit and get your thoughts as well, John.
Rosevear: The power consumption thing actually is significant. You’re putting a data center in the trunk of an electric car, it’s going to draw a lot of power. Obviously, drawing less power is better, because that leaves you with more range for your self-driving car. This is significant. It’s not really in the minds of a lot of investors and people thinking about this quite yet, but it’s going to be a big discussion as these things start to roll out. Yeah, sure, we’ve got this great autonomous system, but the computing apparatus uses so much power that it only has 80 miles of range and it has to come in and recharge every few hours. Tesla seems to have a little bit of a leap on NVIDIA right now on that front. Again, we don’t know how this is going to shape up once the cars actually start to deploy, though. But that is significant. The power consumption is more significant than I think people are realizing right now.
Sciple: Yeah, right, exactly. So when Elon comes out and says the chip is objectively the best in the world by the measure of both cost and computing power to the energy required to run the chip, this chip is among the best in the world, if not right up there in a class of its own. Really a significant breakthrough.
Rosevear: If they deliver on the claims.
Sciple: Yes, yes. And that’s where, moving on, some of the folks in the autonomy industry more broadly, the questions they’ve put forward to Tesla, and Musk has responded to these, is, Tesla’s strategy depends on using only cameras and a forward-facing radar array to observe the world and carry out its self-driving functions. Elon has dismissed LIDAR and HD maps used by the rest of the industry as crutches. He said humans only use their eyes to drive. Again, there have been questions from other folks in the autonomous vehicle community as to whether it’s prudent to pursue a strategy not using LIDAR and HD maps, not using a geo-fenced, controlled area to operate your self-driving vehicles. We’ll see how the strategy works out for Tesla, but that’s been the question mark.
Rosevear: The people I talked to around this think, “OK, you can squint and see a path here, but it’s a moonshot kind of path.” It’s a, maybe they come out in 10 years, and they’ve made it work kind of path. It’s not a, this is going to market with a high level of safety next year kind of path. And with vehicles carrying people, a lot of the thinking around autonomous vehicles at other companies has come from the same kind of thinking we do around aircraft, when they fly on autopilot. You need redundancy, you need a backup, you need belt and suspenders and maybe a parachute, too. That’s why LIDAR. LIDAR, with the 3D maps, this is for vehicles that are basically limited to the area they’ve mapped. LIDAR takes the measurements that tells the car where it is on the map, with a great deal of precision, to a few inches or less even. Is that a crutch, if you’ve got a really, really sophisticated system with a lot of cameras? You can sort of squint and see how it might be, or at least so the people who are far more expert in this tell me. But again, it’s a moonshot. It’s a moonshot, to be able to pull this off.
Sciple: Right. The question really comes from, getting a car to the level that it can do driver assist systems, follow cars, lane keep, that sort of thing, is comparatively not that difficult, compared to reaching a level five system that can handle any sort of occurrence that may happen. That’s where a lot of the industry has said that to get to that first level of self-driving, the LIDAR and all that stuff may be superfluous; but to get to that 99.999, that extra confidence interval that these extra observations give you, is what Waymo and Cruise have cited as something that’s really important. We’ll see how Tesla’s system plays out. It’s going to take some time for their inference systems to continue to learn.
Rosevear: Waymo and Cruise, and I’ve talked to senior officials at both companies, or at least at GM. I have not talked to Kyle Vogt, the CEO of Cruise, but I have talked to Dan Ammann, who is his boss. The thinking is, safety is so critical here, because it’s going to be all about public acceptance of the technology. It could easily go in a direction of, “Robot cars kill people, I’m not getting in one.” And then the whole business is bust, it’s gone. At least for a generation. They’re being so careful. Waymo and Cruise are racing, but they are racing with great care. Just talking to people at GM, they had said, “We think we might get it out 2019.” Now they’re saying, “We’re going to get it out when it’s ready. We’re going to get it out when it passes our safety gates. We’re not too concerned about when that is. We’re going to get it out what it passes our safety gates.” With Waymo, they’ve started a little bit of deployment. But again, it’s the same kind of discussion. It’s got to be safe, they’ve got to know it’s safe, they’ve got to rock-solid trust it.
And Tesla’s saying, “We’re going to leapfrog all their technology and we’re going to have it all out there next year.” I don’t know, man! [laughs] It’s a real different thing! [laughs]
Sciple: The other advantage Tesla has cited, they cited their chip gives them advantage, they think the rest of the industry is using a system that’s not going to scale as well, using LIDAR and things like that. Tesla’s also talked about the advantage they have from their fleet from a data point of view. Waymo and Cruise, you have to use test drivers to make observations. Tesla has, I want to say, hundreds of thousands of vehicles on the road. They can report data back to them, then label that data and use that to do some learning.
Rosevear: But there are questions of how much data is really getting reported back to Tesla and how much processing they’re able to do around it and so forth. It seems fairly clear that they’ve got data, but it’s not the advantage that they’ve tried to play it up as.
Sciple: Yep. Last thing, they called out this Tesla Network they’ve been talking about for a period of time, that Tesla owners, they buy the vehicle, and then through the Tesla app, let their car drive autonomously, drive people around when they’re not using the car. Elon has said they will have one million level five robo taxis on the road with the hardware necessary for self-driving by 2020. To be seen whether that’s delivered upon. Tesla first said its vehicles had hardware capable of full-self driving in October 2016. We’re here today in May of 2019. If Tesla delivers, this is a huge, huge thing for the company. Obviously, it’s going to drive demand for them to purchase the cars, should they deliver on this offering. And Tesla needs to drive demand today. To be seen.
Any last thoughts? Once this this full-self driving is realized and Tesla moves toward a fleet structure, does the business have to change to accommodate that? Assuming everything goes according to plan, what does Tesla look like in five years?
Rosevear: Well, first of all, the cars have to change. This is the first thing I thought — all the Tesla guys make fun of the Chevy Bolt because it’s upright and boring and it has this rugged cloth interior that isn’t soft and sexy like the leather seats, and all this stuff. Well, guess what? The Bolt is a taxi. The Bolt was designed for this application, it was designed for Uber/Lyft duty with an idea that eventually, they would use it as their platform for autonomous driving. And that it would be a self-driving taxi in time, and that it would evolve into one. And in fact, that is where GM is going. The Cruise vehicle is a heavily modified Bolt. It’s a very different kind of car. When you’re designing a vehicle to go a million miles in fleet service, you design the interior very differently, you design the shape of the vehicle very differently, you design the roofline very differently, you use different motors, you use different fabrics, you use different assembly techniques, to the extent that your self-driving car has a dashboard, because there are all sorts of squeaks and rattles possible in there. Nobody is going to convince me that you take a Model 3 and put a million miles on it and anybody’s going to want to sit in that. Especially if it’s a million miles on taxi service.
First of all, Tesla can’t get spare parts out for the cars it has in a timely fashion, which is becoming a growing issue to expanded adoption. You’re going to put these cars in 24-hour-a-day service and tell us that you’re going to run them a million miles, but not make parts available? They’re not ready for this. They haven’t thought this through. I mean, they haven’t thought this through with people who actually understand the issues, it’s clear. This is a another one of these things that we talked about back on March 7 — Elon just came up with this thing, and they scrambled to get something out on it. They haven’t thought it through. The Model 3 is not the product you want for this. The Model S certainly isn’t a product you want for this. This just isn’t going to work. It certainly isn’t going to work for $0.18 a mile or whatever they said. [laughs] It’s just not! There’s some skepticism as to whether anybody will ever get much below $1 a mile, even running with purpose built-vehicles that are relatively inexpensive to manufacture and all of that.
Sciple: Yeah. Along those lines, just in the past week or two, three different ride hailing or car rental companies that were utilizing Tesla in their fleet have ceased operations in three different countries. You had a Chinese ride hailing company, Shenma Zhuanche. I’m not even going to try to say the second name. They rented three billboards on Time Square saying that they had had issues with 20% of their Teslas in their fleet, which led to them losing money at EC-Rent, which is a Netherlands-based company used to rent out Teslas by the day. They cited they had to shut down their activities due to increasing technical defects with their Tesla fleet. Also, a ride sharing company in Sweden, Umea Eltaxi, filed for bankruptcy, blaming in part the Model S that are operated as part of its fleet. Again, we’re going to have to see some proof out that these cars can function over a long period of time as autonomous taxi vehicles, that the maintenance is going to be there for this to be able to work at scale.
But, you know, time will tell. Elon has achieved things that are very incredible that people doubted in a very serious way before. We’ll just have to see.
I want to move on, John, we’re running late on our podcast, so we’ll run through a few things quickly. The SEC settlement, we got that finalized last Friday, I believe. There’s been a lot of hype around this, but it turned out to more or less be a nothing burger.
Rosevear: Yeah, it’s sort of reminding him what he can and can’t say without permission. [laughs] Without prior approval.
Sciple: Yes. The original settlement had said that Musk couldn’t tweet about things that would materially impact Tesla’s stock. There were some questions about what material meant there. With this new settlement, the SEC essentially enumerated, you can’t tweet about securities, you can’t tweet about very, very specific things. The guidelines are much more tightened down. The judge really wanted the SEC and Musk to settle it on their own, and that happened. We’ll see how things develop. But there’s much more clear guidelines on what Elon can tweet, and that’s what the SEC has done.
When we talked March 7th, we talked about the Model Y and the questions around where that might be manufactured. When we heard the Q1 earnings conference call, Elon confirmed our suspicions that Tesla does not yet know where they’re going to manufacture it. They’re choosing between Nevada and their factory in California. What’s interesting there, though, is Elon said that they’ve already ordered the tooling that will go into the factory. Any thoughts on that, John?
Rosevear: Yeah. Who’d they order the tooling from? [laughs] They haven’t ordered it from any of the big companies. If they have, it’s been kept very, very quiet. And, how do you order tooling without knowing the space the tooling is going into? You don’t. At least, you don’t order all of the tooling. Maybe they’re having dyes made or something like that. But it’s not like they’re going to be ready to install a production line anytime soon. And even then, if it’s going to be at the Nevada Gigafactory, they’ve got to build a paint shop. That’s an essential component in a car factory. It takes time to build, it takes money to build, and there haven’t been any signs that they’ve started doing anything like that yet. Maybe they’ve ordered some tooling. Maybe they’ve gotten price quotes on some tooling from some company somewhere. I would take that with a grain of salt at this point.
Sciple: Sure, yeah. If you don’t know the box that the tools have to fit in, I don’t know. But, we’ll see. Elon’s a lot smarter than me.
Two more things. First, there’s been some changes around how customers can order the Model 3 standard range. That was the $35,000-$36,000 Model 3. You now have to either call or go to a Tesla store to order that vehicle. As you see Tesla changing the way customers can purchase that lower-end Model 3, any thoughts or response to that?
Rosevear: You have to go to the store and whisper the double secret password, if you can get one. It allows Tesla to claim they’re selling it, but I don’t see too many getting bought. And of course, you go to the store and whisper the double secret password, and they say “Hey, the short-range model doesn’t come with all these features that you see on this car right here. Don’t you want to pay a little more and get something a little nicer?” [laughs] Something that will actually deliver some margins to Tesla, which I’m not sure a $36,000 car does.
Sciple: Something to follow. Last thing I want to talk about, and this news has gotten swallowed up in all the other news around Tesla, but on Good Friday, Tesla dropped a filing announcing that 40% of their board is going to be leaving at the end of their term. Board members Brad Buss and Linda Johnson Rice will be leaving after the 2019 annual meeting, and Steve Jurvetson and Antonio Gracias will be leaving after the 2020 annual meeting pending and approval for Gracias. And from what I’ve seen, there’s no intention to replace these board members. They’re going to downsize the board. Thoughts on that?
Rosevear: Again, there’s a story here that we haven’t heard yet. I don’t know if this is Robyn Denholm, the new chairman, coming in and saying, “Look, we’re going to do corporate governance differently around here.” There was some sense that these folks represent the Elon clique on the board, along with Kimbal, Elon’s brother, Kimbal Musk. Obviously, Kimbal isn’t going anywhere because he’s Elon’s brother and he’s a significant shareholder. But this was maybe, as part of a discussion with the SEC, or somebody, or maybe just to try and pre-empt an unfortunate discussion with the Justice Department or something, [laughs] that they’re trying to institute some more serious corporate governance controls here. That might mean reshaping the board. Again, I think we’re not going to know the full story for a while, but we’ll know it eventually. Somebody will write the book. But right now, it’s yet another one of those Tesla things where, “Oh, that’s interesting!” We can develop hypotheses about what happened. The bearish people will develop their hypothesis, and the bullish people will develop their hypothesis, and there’ll be just enough evidence that you can’t tell who’s right. [laughs] So many things with Tesla boil down to that.
Sciple: Yeah. It’s interesting to me, the SEC had the company increase the size of its board by a couple of members back in the fall, and now we’re seeing the shrink, turning back around the other way. Again, something to follow. Something to lay into the greater tapestry of what’s going on with this company.
As we go away, John, this company, it’s the most divisive stock in the stock market, and it’s not close. People on either side of this company are very convinced that their viewpoint is correct. That’s what makes the market, right? There’s buyers and sellers every day, and I think that’s really important. I’ll say, for my view, there’s just a lot of red flags with this company right now that I’m personally not comfortable with. As I said off the top, I own some puts. We’ll see how things play out.
But, John, any advice for folks looking at Tesla today? How do you think people should view the company moving forward?
Rosevear: It’s priced for perfection. Even at $240 a share, it is priced for perfect execution and market dominance within a decade. If you can step away from a fervent desire to see their mission accomplished and just look at the execution of this particular company, it is awfully, awfully hard to see that happening. It just is. That doesn’t mean Tesla is going to go out of business. But I keep thinking about the resets we saw around some of the more hyped stocks during the .com boom. I’m old enough to have been an investor in 1999 and 2000. I remember that well. And I keep thinking, there is a future for Tesla, where the stock completely blows up and the thing trades at $15 for years and years. I think investors looking at buying in at $240 or holding at $240 or whatever it is by the time this podcast runs later today, [laughs] it’s around $240 right now, I think — you really need to think about that. I hear people talking about taking out home equity lines and putting it into Tesla stock and stuff. We saw a lot of this in a more compressed time frame in 1998 and 1999. And that ended badly for a whole lot of people. Just think about what you’re doing here. It is entirely possible to support the mission of Tesla, to support a global movement toward zero emissions transportation options, and to say, “Holy smokes, this company is way overvalued.”
Sciple: Yeah. And for me, the car, it’s a really impressive car. Electric vehicle, the performance, the way it can accelerate, they really created this market. They started doing over-the-air software updates that now the entire industry is starting to adopt. They created an entirely new look for the vehicle. They smartly realized, “We don’t need this front grille on our car. Let’s make this smooth so our car looks totally different from every car on the road.”
But again, as you look at the business from a fundamental point of view, it’s really hard for me to see a clear path to growth here. I hope I’m wrong. I hope they succeed. But we’ll see. John, we’ll have you back on, I’m sure, to discuss. This story is far from over.
Rosevear: All right. Thanks very much, Nick!
Sciple: Yep. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don’t buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For John Rosevear, I’m Nick Sciple. Thanks for listening and Fool on!
John Rosevear owns shares of Apple and General Motors. Nick Sciple owns shares of Apple and has the following options: long August 2019 puts on Tesla, long January 2020 puts on Tesla, and long January 2021 puts on Tesla. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
