5 Reasons To Take Your Tesla Profits Now
If you are fortunate enough to have purchased Tesla shares at a price below $270.90 -- where it traded after-hours on September 27 -- I firmly believe you should take those profits this morning
The reasons for selling the stock abruptly tilted way ahead of the reasons to hold it when the SEC revealed that it is seeking to toss Elon Musk out of the company for allegedly misleading shareholders when he tweeted that funding was secured for a $420 a share buyout, according to the Wall Street Journal.
Why the urgency? In a nutshell, given its precarious financial condition and lack of bench strength, Tesla would be in perilous shape without Musk. And the probability of him being gone is higher than it's ever been.
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Two weeks ago, I thought that Musk should be replaced as CEO with an adult -- someone like former Boeing executive and Ford CEO, Alan Mulally. Were Musk to depart and sell his ownership stake, perhaps someone of that caliber would welcome the chance to come to Tesla's rescue.
But I see that outcome as having an exceptionally low probability of happening.
Musk's September 27 statement called the SEC’s move unjustified. “Integrity is the most important value in my life and the facts will show I never compromised this in any way.”
And Musk still has his board under his thumb. According to a September 28 statement from Tesla's board, "Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful U.S. auto company in over a century."
1. The Musk premium
Were Elon Musk to depart Tesla, the company's stock would lose the shareholders who believe in him so passionately.
Unlike other recent people perceived as visionary leaders -- such as Theranos's former CEO, Elizabeth Holmes, Musk has created a company that delivers products that actually work and most people love.
Beyond the loss of the emotional attachment of those who are betting the stock will keep rising, Musk's departure would require Tesla to find a new product visionary to keep the company growing.
Of course, it's possible that Tesla could go the way of Apple. It turned out to be just fine with a CEO -- Tim Cook -- who could squeeze far more profit out of the products developed by the visionary, Steve Jobs.
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2. Cash flow negative
Musk has been able to keep Tesla's stock alive because investors assumed that he would be able to persuade Wall Street to lend the company more money.
Without Musk at the helm, can someone else do that job? With $10 billion in debt, a cash burn rate of $1 billion a quarter, and $2.2 billion in cash left, it does not take a genius to realize that Tesla will run out of cash within the next three quarters unless it can raise more.
That's not all -- paying down two convertible notes would give Tesla less than two quarters before it runs out of cash.
How so? In November Tesla is likely to have to pay down $230 million in a convertible bond -- since there is a very low chance its shares will reach the conversion price of $560.64. And in March 2019, Tesla will need to fork over another $920 million to retire a separate convertible note unless its shares reach $359.87, according to the Journal.
3. No profit
Tesla has a string of financial results that are unblemished by profitability. Musk thinks he can fix that in the third quarter. According to the Journal, he's "[betting that a third quarter profit] will prove to doubters that the auto maker has turned a page and can begin generating the cash it needs to do business without having to raise additional capital."
But as I wrote in August 2017, Musk has a much more compelling track record of what I will politely call exaggerations than of delivering a profitable quarter.
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4. No bench strength
In the past two years, Tesla has shed a whopping 50 vice presidents or higher-ranking executives. "Tesla’s top sales executive, Jon McNeill, left for a role as chief operating officer at ride-hailing company Lyft, while the auto maker’s engineering chief, Doug Field, returned to a job at Apple," according to the Journal.
And its chief accounting officer left for Anaplan, a connected planning company that filed for an IPO recently, after less than a month at Tesla.
That is not a good look for a publicly-traded company.
5. Nervous suppliers
Tesla asked some capital equipment suppliers for cash back this summer. It's hard to see why a company would ship to a company that would not be able to pay. And as the Journal reported, a survey conducted by Original Equipment Suppliers Association found that 18 of 22 suppliers that responded believed Tesla is now a financial risk.
If I owned a Tesla right now -- or was on the waiting list for the Model 3 -- I would be nervous as well. To be sure, old DeLoreans are still around and getting serviced. But they don't need charging stations...
28.5% of Tesla shares are sold short. If Tesla's board tosses out Musk who sells his stake -- and replaces him with someone like Mulally -- short sellers could live to regret their bet.
But the odds seem greater that short sellers -- like Jim Chanos -- could enjoy an Enron-like payday on what has so far proven to be a pretty painful bet.
Peter Cohan, Contributor
