Nothing Boring About Market Response To Musk's Mercurial Tesla Results Call

Tesla earnings calls offer more color and less predictability than is the norm for this dry, procedural requirement, but CEO Elon Musk outdid himself Wednesday when he dismissed "boring" questions from equity analysts in favor of an impromptu interview with a Tesla fan

Photo: © Depositphotos.com/Jean_Nelson

It was entertaining but investors reacted negatively to the mercurial move, sending the stock down 5.6% on Thursday.

Halfway into the first-quarter call Musk balked at Sanford C. Bernstein & Co. analyst Antonio Sacconaghi's question about the company's capital needs. "Excuse me. Next. Boring bonehead questions are not cool," he said curtly.

RBC Capital Market's Joseph Spak fared no better when he asked about Model 3 sedan reservations. "We're going to go to YouTube. Sorry. These questions are so dry. They're killing me," Musk said. At that point, he pivoted to Gali Russell, a 25-year-old retail investor in Tesla who owns a YouTube channel to take gentler questions that Musk deemed more interesting.

While Musk may have enjoyed tweaking conventions and the analysts, the stock dropped 5% in after-hours trading following the call. On Thursday the decline widened, with shares off $16.70 to close at $284.45, the lowest in a month.

His move also stepped on the company's key message for investors: Despite a chaotic quarter for Tesla, overshadowed by ongoing headaches ramping up production of the Model 3 sedan, the unconventional electric car company thinks it has turned a corner and could be generating cash and profit in the second half.

Given the trading action, it looks like many shareholders are skeptical.

Tesla’s net loss of $709.6 million for the quarter that ended March 31 was its biggest ever, topping the previous record of $675.4 million set in the final quarter of 2017. Loss per share was $3.35, excluding some items. The result was slightly better than a consensus expectation of a $713 million loss, or $3.54 per share, excluding one-time items, according to FactSet.

But never one to dwell on the past, Musk painted a sunny picture for the year’s second half, based on the expectation of substantially higher Model 3 and battery production and lower capital expenditures.

“If we execute according to our plans, we will at least achieve positive net income excluding non-cash stock-based compensation in Q3 and Q4 and we expect to also achieve full GAAP profitability in each of these quarters,” Musk and Tesla CFO Deepak Ahuja said in a letter to shareholders on Wednesday. That would be a major accomplishment, given that its only posted two profitable quarters since going public eight years ago.

And in what looks like an acknowledgment that Musk’s affinity for piling on products and programs – which currently include a new Tesla Roadster, Semi, Model Y crossover and autonomous driving tech – has to cool off a bit, Tesla plans to pare capex by more than $400 million from a year ago.

Correctly, it plans to focus on “critical near-term needs that benefit us primarily in the next couple of years,” Musk and Ahuja said. “At this stage, we are expecting total 2018 capex to be slightly below $3 billion, which is below the total 2017 level of $3.4 billion.”

Ten months ago Musk said the Model 3 rollout would be “hell,” which was true. But that expectation doesn’t fully capture a quarter that also included a federal investigation of a fatal Model X crash involving its Autopilot feature, scrutiny of labor practices at its Fremont, California, factory and cash concerns. Perhaps a 25% drop in Tesla shares in recent weeks, nervous investors and the potential loss of hundreds of thousands of Model 3 reservation holders, many of whom have waited over two years for that car, have Musk now thinking that maybe his bold plans for the future gain credibility from tangible results in the present.

During the results call Musk also suggested a “restructuring” was in the works that might impact some suppliers. “We have barnacles on barnacles,” he said, without elaborating. Last month he raged about discovering too many contractors doing too little throughout Tesla's operations. "Often, it is like a Russian nesting doll of contractor, subcontractor, sub-subcontractor, etc. before you finally find someone doing actual work," he said in a leaked memo.

“While the company did slightly better than analysts forecasted and burned through cash a tad more slowly than expected, Tesla faces a make-or-break year,” said Michelle Krebs, executive analyst at Autotrader. “The big questions remain: will investors step up to put more cash into the company and can Tesla conquer the Model 3 production challenges.”

Production of Model 3s, nominally priced from $35,000 though currently selling for about $50,000, improved throughout the quarter, currently exceeding 2,000 per week. The company reconfirmed that it will be producing at least 5,000 per week “in about two months.”

It needs to build those much faster as it has a waiting list of more than 450,000 people waiting for cars, and presumably, their patience has its limits.

Customer deposits for those vehicles, as well as for Model S sedans, Model X crossovers, Roadsters and Semis, totaled $984.8 million, up from $853.9 million at the end of 2017.

Tesla didn't mention any plan for additional fundraising in its results letter or during the call, although a number of equity analysts have predicted that will happen this year. Moody’s Investor Service in March downgraded Tesla’s debt to an even lower junk rating on concerns about its financial stability. Cash and equivalents totaled $2.7 billion at the end of the quarter, down from about $3.4 billion at the end of 2017's fourth quarter.

"Notably, reported free cash flow was less negative than we expected, but we remain concerned about cash levels," CFRA analyst Efraim Levy, who rates Tesla shares a Hold, said in a research note. The drop in cash to $2.7 billion was lessened an increase in customer deposits of about $130 million, Levy said.  "Combined with about $400 million reduction in planned '18 capital spending, this should mitigate capital raising needs. Still, we expect a further capital raise during the '19 Q1."

Musk also railed against Tesla "haters" on the call and people who short the stock. "If you don't like volatility you shouldn't own our stock. You buy stock for the long term," Musk said toward the end of the call.

It appears many people are taking his advice at the moment.

Alan Ohnsman, Forbes Staff

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