Practical Investment Commentary - No Hype

September 13, 2019.

That’s the day Tesla will file bankruptcy.

How do I know?

I don’t.  I just made it up.  I picked it because it’s a Friday the 13th, next year, which seems fitting.  The bankruptcy of Tesla could happen sooner.  Or later.  But it is inevitable. Even Elon Musk joked about it on April Fool’s Day.

Tesla Goes Bankrupt
Palo Alto, California, April 1, 2018 — Despite intense efforts to raise money, including a last-ditch mass sale of Easter Eggs, we are sad to report that Tesla has gone completely and totally bankrupt. So bankrupt, you can’t believe it.

— Elon Musk (@elonmusk) April 1, 2018

Not just one joke, but two jokes, with a picture!

Elon was found passed out against a Tesla Model 3, surrounded by “Teslaquilla” bottles, the tracks of dried tears still visible on his cheeks.

This is not a forward-looking statement, because, obviously, what’s the point?

Happy New Month! pic.twitter.com/YcouvFz6Y1

— Elon Musk (@elonmusk) April 1, 2018

All harmless fun, right? Not so much, if you look at the actual financial statements.  We’ll get to that, but first:

Yes, I have driven a Tesla.  Not mine, someone else’s.  It was cool.  An electric car is very quiet.  The big computer screen is cool.  But here’s the thing: it’s the electric car that’s awesome, not the Tesla.  All electric cars are quiet.  They are electric.  That’s why they are quiet.  You want to see some cool electric cars?  Look what’s coming from Porsche

and Jaguar

and Mercedes

By September 13, 2019 Tesla won’t have a monopoly on cool looking electric cars.  In fact, Tesla may not even be in the top five of cool looking electric cars.

More importantly, who do you trust to build a quality car?  Mercedes or Porsche or Jaguar who have been doing it for many decades, or a new company that consistently misses production targets, proving they can’t do it?

But wait, you say, what about the technology?  Doesn’t Tesla have the best technology?

No.

Tesla has no proprietary or unique technology.  They are cars, with electric engines.  That’s not unique.  They have a computer in them.  So does every other car made today.

But that’s not the reason Tesla will go bankrupt.  The reason is math.  Lots of math.

Tesla Interest Expense

According to Tesla’s financial statements, in Q4, the three months ended December 31, 2017, Tesla had interest expense of $146.363 million, which annualized is almost $600 million, which is $4,884 for every car sold!

Tesla’s gross profit in the fourth quarter was $439 million, so more than one third of their gross profit goes to servicing debt.  That is not sustainable.

Gross Profit

Speaking of gross profit, what Tesla discloses on their financial statements is bogus.

According to Ford Motor Company’s financial statements,

Engineering, research, and development expenses, primarily salaries, materials, and associated costs, are reported in Cost of sales

Makes sense.  The cost of making a car includes the cost to develop a car.  If you do a bunch of R&D to make a car that will sell for five years before the next model, you should spread out those costs over the life of the car, in the cost of sales.  For Ford, in 2016, they had $7.3 billion of R&D in Cost of Sales.  Their automotive segment has $141.5 billion in revenue, and cost of sales was $126.6 billion (including R&D), resulting in gross profit on car sales of $14.96 billion, or 10.6%

What about Tesla? Sales $11.76 billion, cost of sales $9.51 billion, for a gross profit of $2.25 billion, or 19%!  See, Tesla is better than Ford!  Yeah, except they put R&D “below the line”.  If you include $1.38 billion in research and development in cost of sales, where it should be, gross profit drops to $0.87 billion, or 7.4%.  That’s not horrible, but it’s a lot worse than Ford.

Cash Flow

Tesla’s cash flow for 2017 was negative $4.14 billion.  That’s not good.  At the end of the year they had $3.5 billion in cash, so unless they improve their cash flow, they will burn through their cash this year.  Of course Tesla has had no trouble raising money, but what happens as interest rates continue to increase, and the market catches on to the fact that Tesla loses money on every car they make?  At some point, will they not be able to raise cash?

Yes, that’s how it works.

There is a lot more to this story, but that’s the gist of it.  Tesla is a scam.  It’s run by a great salesman, but he can’t profitably build cars, so this is a dead company walking.

I went short on Friday at $303 per share.  Let’s see how that speculation works out.

Thanks for reading.  More next week.