Tesla in a spin as it falls deep into the red - but Musk is unfazed
He says he may need to raise funds as electric car maker suffers a $702m loss in the first three months of 2019
To his many admirers, it is always too soon to write off Elon Musk. After a year of controversy, Tesla’s billionaire boss appeared to be through the worst of it.
His electric car company had battled through manufacturing hell to “delivery logistics hell”, and seemed to have emerged intact on the other side. His Twitter rants, investigations by US regulators and a botched $72bn plan to take Tesla private seemed to be passing into memory after six months of positive results.
But in its latest report to investors on Wednesday, Tesla dropped a new bombshell. More than an hour after the market closed and the results had been expected, investors learnt that Tesla had suffered a $702m loss in the first three months of 2019, underscoring that its most pressing problem remains the struggle to stem losses.
In fact, the car maker is not expecting to make a profit until the second half of 2019 as production problems persist.
“This is the most difficult logistics problem I’ve ever seen, and I’ve seen some tough ones,” Musk, chief executive of the electric car maker, told investors. He was referring to the challenge of physically getting cars to customers in Europe and China, which pushed back many deliveries to the second quarter. Things were so dire for the company that Musk drafted in legal, human resources, sales and engineering staff to help drive delivery numbers higher.
Even so, Tesla sank deep into the red in the first three months of 2019, a bitter blow for the company after two consecutive profitable quarters.
In 2018, Musk said he expected Tesla to be continuously profitable, but lower-than-expected sales have now pushed the company back into the red. At $4.5bn, revenue was below analysts’ expectations, a fall of more than a third since the final quarter of 2018. Unsurprisingly, investors were not impressed, with shares falling more than 3% after markets opened on Thursday.
Daniel Ives, analyst at Wedbush, said in a note to clients: “In our 20 years of covering tech stocks we view this quarter as one of the top debacles we have ever seen ... Musk & Co in an episode out of the Twilight Zone act as if demand and profitability will magically return.” He added: “We no longer can look investors in the eye and recommend buying this stock at current levels until Tesla starts to take its medicine and focus on reality around demand issues, which is the core focus of investors.”
With the electric vehicle market becoming increasingly competitive, with a slew of new products being launched by rivals including VW and Toyota, demand for Tesla cars is under close scrutiny. At the start of the month Tesla warned that first-quarter income would be negatively affected by “lower-than-expected delivery volumes”. Ahead of the results, Bloomberg Intelligence analyst Kevin Tynan had said demand would be the company’s “most important measure”.
But, Musk dismissed any concerns. “Overall, I feel really good about the way things are headed,” he told investors, as he revealed the company delivered about 63,000 cars in the first three months of this year, significantly lower than the 76,000 predicted by analysts. “My impression right now is that demand is quite solid, quite strong,” Musk said.
Yet, questions persist. For example, why is Tesla cutting prices on some of its models if demand is so strong? “If you claim that demand is huge and unlimited then the key question is, why do you lower your pricing?” Arndt Ellinghorst, head of automotive research at Evercore ISI, said on CNBC.
Demand for its cars is not the only question hanging over Tesla’s performance. Another looming question is access to cash. After two profitable quarters, which helped alleviate some of the pressure on Musk, the loss-making start to 2019 saw Tesla burn through $1.5bn of cash and equivalents. The firm now has just $2.2bn in reserves remaining.
Musk hinted that the company could raise money, telling investors on the quarterly earnings call: “At this point there is some merit to raising capital. It is probably about the right time.”
That is one way of putting it. It may be essential if Tesla continues to go through cash at its current rate.
The company’s chief finance officer was more dour on the numbers. It was “one of the most complicated [quarters] in the history of the company”, said Tesla finance head Zachary Kirkhorn.
But, says Colin Herron of electric vehicle consultancy Zero Carbon Futures, such hurdles are to be expected. After all, Tesla is building something from the ground up: “A new car company with a new car and with a new propulsion system, building new car plants across the world, new battery plants and a worldwide charging infrastructure. Are other electric car makers making profit on the product? The answer is no, as the investment costs cannot be covered by the very low volumes. Will they be profitable in the future; yes, but the days of very low-cost cars may be over.”
Many of the major car makers, he says, are recovering their electric vehicle losses in other parts of their businesses.For now, the market may be disappointed by Tesla’s figures. When asked what it was like running a public company, Musk said it was like “having someone stand outside your home and randomly yell different prices for your house every day”.It’s fair to say Tesla has had a bumpier ride that most, with its value falling 30% since the start of December. But, when it’s tough to find a company to compare Tesla to, these swings can be expected. Judging by its past, there may be difficult quarters ahead for the company. Perhaps, the best thing Musk can do is invest in some earplugs.– © Telegraph Media Group Limited (2019)