Tesla Shares in Free-Fall After Terrible Earnings
As investors deal with the incredible news that Tesla lost $2.90 a share versus the $0.65 they expected, TSLA stock was initially stable. As we got closer to the end of the week, however, the decline has accelerated. These moves come at a time when U.S. GDP could be peaking, and consumers are flush with cash. Companies with weak earnings and massive debt like Tesla are going to be looking extremely vulnerable if the economy starts to turn.
Musk Finally Admits They Need To Raise Capital
During the most recent earnings call, Elon Musk, who has long resisted the idea that Tesla has been struggling with capital restraint, made an extremely noticeable U-turn. Amid a firestorm of layoffs and cutbacks, the Tesla CEO stated:
“There’s merit to the idea of raising capital at this point.”
Tesla Insurance Needs To Work
Well, that’s an understatement. The proposed insurance plan using driver data from cars is a possible means of raising funds, and Musk said it could happen as soon as next month. Elon has done a great job at conditioning us to ignore when his forecasts seldom come to fruition. Who remembers this quote about the Model 3?
“In order for us to be confident of achieving volume production of Model 3 by late 2017, we actually have to set a date of mid-2017 and really hold people’s feet to the fire, internally and externally.”
That quote has aged poorly given reports of employees being laid off at a moment’s notice and others having to volunteer to try and keep the company afloat. None of this looks healthy and brings us to an exceptionally concerning word. Dilution.
Dilution Of TSLA Stock Looks Like a Very Real Possibility
Stock dilution is where a company seeks to raise capital by issuing more stock. This causes an individual’s ownership rights to decline and naturally hurts the value of shares. As tax incentives expire and demand is slowing, the following Morgan Stanley analyst believes Tesla needs a multi-billion dollar cash infusion:
As we learned from the video, one-third of Tesla’s cash is deposits for future deliveries. Last year Tesla started increasing the length of time it takes to get a refund, and this is yet another puff of smoke revealing the capital shortage fire burning under the hood (I promise that wasn’t a safety dig).
Fundamentals and Technicals Now Overwhelmingly Bearish for TSLA
The technical signals and fundamentals are now bearishly aligned and there is a non-negligible risk of a desperate stock issuance to raise capital. It’s hard to see where the good news for TSLA stock will come from. Removing Musk as CEO might be one way for the board to try and reassure investors. Fortunately for Musk, with so much capital tied up in his future projects, he’s probably too integral to the brand. Maybe it’s time to finally go cap in hand to Tim Cook at Apple and ask for help and infrastructure.
About The Author
Financial speculator living in the hills in Los Angeles. J.D. but very much not a lawyer. Favorite trading books are anything written by Jack Schwager.