
Why almost everyone was wrong about Tesla’s cash flow situation - TekMol
https://arstechnica.com/cars/2018/10/how-tesla-proved-cash-flow-critics-wrong/
======
InTheArena
This seems like a good breakdown - but it's also that Tesla (like SpaceX) runs
really really close to the edge every time they do a product launch. How many
people doubted SpaceX until the Falcon 9 flew? How many until the Falcon 9
landed on land? How many until Falcon 9 Heavy launched? How many are still
doubting until Falcon 9 completes it's first manned mission? How many doubted
Tesla until the Roadster shipped? The S, the X? The 3? The low cost 3?

It's still a startup - but Elon's companies move fast and take a toll on
everyone.... then one day you look up and rockets are landing on barges, and
60% of world wide lithium battery capacity has been grabbed by Tesla, and
Tesla suddenly selling the top sedan by revenue, and the fifth by number of
units in the US.

Then competitors have to start working and playing like Tesla and SpaceX - the
companies have to become more startup like. You can see this in how
ArianneSpace and ULA are trying to get to their next generation of vehicles
(which won't be competitive in terms of re-usability) and by the increasingly
hyperbolic VW statements about "delivering a car as good as any Tesla at half
the cost" this morning....

Tesla and SpaceX have multi-year advantages - they have the super charger
networks, they have the only facility capable of cranking out the amount of
batteries that electric cars need, reusable rockets, dominating market share
over all other luxury cars in the wealthiest market in the world, which
happens to show signs of becoming more "European", as in much larger luxury
market segment then there is in the United States..

It's definitely taken a hit on people's sanity - but you suddenly look up, and
the competitive grounds have changed dramatically.

~~~
calabin
Responsible cash management and investor relations are not mutually exclusive
with innovation. There is absolutely no reason that TSLA shouldn't have raised
cash with a relatively inexpensive bond issuance or moderate share issuance in
the lead-up to the large expenditures required to begin Model 3 production.

As a consequence of this, analysts rightly discounted TSLA's stock price to
account for the tremendous amount of risk he was taking by operating with
little-to-no room for error. The fact that he was able to operate inside of
that slim margin does not indicate that he should have.

Elon himself was so flustered by the consequences of his poor cash management
(and resulting discount in the stock price) that he ended up plainly
manipulating the stock price and nearly got himself banned as a D&O of a
publicly-held company.

I'm tired of all of this hero-worship, and the smug "this is what it takes to
change the world" discussion around his insane actions. The innovation and
change brought about by the Model 3 is not a good excuse for Elon nearly
killing the company to maintain his pride.

Last, the fact that raising money to ensure the financial stability of the
company is seen as a pride-diminishing act by Elon is in itself worrying.

~~~
ajross
> As a consequence of this, analysts rightly discounted TSLA's stock price

TIL some of the wildest, most speculative short selling in history is "rightly
discounting" a stock price.

That's revisionist. I mean, yes, you're right that they could have operated
more in line with traditional accounting. But that's not why their stock price
was held incorrectly low.

~~~
calabin
There were plenty of reasonably thought-out cases to short Tesla, and there
may still be. The company has had numerous recent instances where they've
failed to pay vendors and their runway was shortening at a concerning pace.
These are legitimate reasons to short a company's stock if you find them
persuasive.

I don't disagree that there was some wild speculation, sensationalistic
articles, etc., but that doesn't make all short sellers wrong for believing
that the price is inflated.

Last, who's to say that the price was incorrectly low? Was it incorrectly high
before? Is today's price the right price? I do not believe that there was some
conspiracy to artificially depress the price of the stock if that is what you
mean.

~~~
ajross
> Last, who's to say that the price was incorrectly low?

Uh... you. Because you're the one who introduced the "rightly discounting"
nonsense that I was arguing with. Clearly you have an idea of what the stock
price "should" be because otherwise there would be no "right" in your
"rightly", right?

You just don't agree with the price the market has picked NOW, when you
thought the price it had THEN was just fine. And you're reaching for stuff
like "accounting norms" as justification, when the real truth is that, no,
TSLA was artificially low due to short selling.

------
anoncoward111
Serious question, and I'm not a Tesla hater either:

Why does anyone spend $35,000 - $50,000 on a car? It just feels like a number
that is at least 5x too high.

A used car from a fairly reputable source can be had for between $3,000 -
$6,000, depending on mileage and cosmetic appearance. My 2005 Ford Focus sedan
was $3,000 and should last me about 3 years before I need to make a decision
about major repairs, so that's less than $100 a month in ammortized costs.

Are there really hundreds of thousands of people who are making $5,000+ a
month necessary to justify the purchase of such an expensive vehicle? I'm not
far from that number and most of my money still goes to food and rent.

~~~
madeuptempacct
"Why does anyone spend $35,000 - $50,000 on a car? It just feels like a number
that is at least 5x too high."

If someone makes $250,000+ a year, it's not unreasonable.

"My 2005 Ford Focus sedan was $3,000 and should last me about 3 years before I
need to make a decision about major repairs, so that's less than $100 a month
in ammortized costs."

That's completely unrealistic. You have some sort of competitive advantage
(REALLY know someone trustworthy), or you are delusional. $3000 cars are
generally very high mileage, unreliable, in poor condition, etc. Timing belts,
suspension components, drive belts, starters, ac compressors, minor
electronics, etc tend to start going on these cars.

"Are there really hundreds of thousands of people who are making $5,000+ a
month necessary to justify the purchase of such an expensive vehicle? I'm not
far from that number and most of my money still goes to food and rent."

I believe a car should be 3 months income at most. So no, I can't justify
anything past a $10,000 car.

What I can say for sure is that unless you are a decent mechanic with tools or
have GOOD friends / relatives that are, you shouldn't walk around espousing 3k
cars. They just cost way too much in time.

~~~
esotericn
Maybe I'm just an outlier.

My cars generally cost about 300-500 quid. If it breaks I buy another one. I
can buy 5 or more of them for your quoted 3K.

Are they as safe as a Model S? No. Are they substantially more dangerous than
other things I do in my life? Probably not.

Once things start to break you scrap it and get another one. Done.

I bought a Civic for 325 GBP, changed the tyres for ~150, and drove it around
half of Europe, putting 10K miles on it before selling it because I moved in
to a city for a while. I basically just treat cars as a 'subscription cost'
model rather than any form of capital.

In the US you have the issue that a car might be a hard requirement to get to
work. In that case I'd probably just buy two and drive them on alternate days
so there's always a backup. You guys seem to have enough land for this to be
viable. Still cheap as chips.

~~~
antisthenes
Aren't insurance costs way higher than the amortized cost of the car itself?
Especially in the UK?

> In the US you have the issue that a car might be a hard requirement to get
> to work. In that case I'd probably just buy two and drive them on alternate
> days so there's always a backup.

As long as you're not paying almost double insurance, this sounds like a good
option. You could even rent the other car out on the C2C rental exchange.

~~~
esotericn
This is the case, yes, but generally insurance companies are aware that you
can only drive one car at once and adjust premiums appropriately.

That said, in the UK it's hard for me to think of a circumstance in which two
cars would be a hard requirement for someone who can't 'afford' a decent car.

Here, you probably live in or close to a city. You might not want to cycle in
or get a taxi/bus to work every day, but if your car fails you could probably
do that whilst getting another one.

So the second car is only necessary if you live in the country, which is a
minority, it's nowhere near as common as the sort of "live 30 miles outside of
work with no train station" stuff that happens in the US.

If my car breaks it doesn't really even matter. I use it because it's easier
to do big supermarket runs and saves a bit of time here and there; the cost
equation works out roughly equivalent to using public transport.

~~~
perl4ever
"generally insurance companies are aware that you can only drive one car at
once and adjust premiums appropriately."

I'm in the US and that's not my experience. My insurance is fairly cheap, but
it did indeed nearly double when I got a second vehicle despite there not
being any additional people to drive it.

------
simonebrunozzi
The article seems very imprecise on factual data.

> With $3 billion in the bank and a growing cash cushion, Tesla won't need to
> raise any cash to pay off the big $920 million loan that's coming due next
> March.

Except that there's less in the bank, and that Tesla owes something like $3B
to suppliers.

I am not a financial expert, but I'd think that the situation is not as easy
as it is depicted here.

~~~
RivieraKid
Agreed, the article is a very basic and imprecise overview of Tesla's
finances, it brings no new insight. The more informed shortsellers and
investors go to _much_ more depth. The headline is quite... bold, given that
the author doesn't know much about Tesla's finances and corporate finance in
general.

By the way, last quarter was a big surprise to everyone, bulls and bears.

------
bflesch
Shouldn't we wait for the fully audited FY2018 results before making these
bold claims? I feel with Tesla it is always swinging to the extremes.

You could do a lot of accounting magic to make one quarter appear great, but
it will show up in the full year's numbers. We have to remember that they have
a lot of churn in the financial department, for example the CFO left in April
(see [https://www.business-standard.com/article/companies/elon-
mus...](https://www.business-standard.com/article/companies/elon-musk-s-tesla-
sees-a-flurry-of-executives-leave-the-company-since-2016-118101800200_1.html)
)

~~~
wjnc
I had the same feeling. Could use an accountant chiming in here.

On the one hand the third quarter update clearly states 'Unaudited' above the
statement of operations and balance sheet. On the other hand, they present
GAAP-figures. As far as my practical knowledge of working with accountants go,
they would frown quite heavily upon using 'new and improved' accounting
methods for their Q3-update. Even for 'unaudited' GAAP-figures 'we'
(investors) should be able to expect a continuous accounting practices from
the firm. But it's good practice to read any statement of an accountant
dilligently (ever read an ISAE-statement?) and read non-audited statement with
even more caution.

~~~
appleiigs
For a public company the size of Tesla, unaudited will be the same as audited.
Sometimes in the MD&A, they use adjusted figures because it tells a story
differently (maybe more accurately) than un-adjusted GAAP figures.

------
TekMol
Short version: They never had a cash problem. They invested the money they had
into developing a car. Turned it into a success. Then invested even more into
the next car. Turned it into an even greater success. And so on.

I wonder how profitable this type of 'short opinion piece' journalism is. How
much does a journalist get paid to write something like this?

Running some content websites myself which make like $0.001 per visitor, I am
surprised this can be sustainable.

~~~
binarybits
Author here. What do you mean by "short?" The piece is 1,500 words, which is
about double the length of a typical newspaper column.

I'm not going to get into the exact economics, but Ars writers write about a
piece a day, and the average piece gets tens of thousands of visitors. Revenue
per article (for most mainstream news site, not just Ars) is significantly
better than $0.001 per visitor. High-end advertisers are willing to pay a
premium to put their ads next to high-quality content and to know the
demographics of the people seeing their ads. None of us is getting rich doing
this though!

We're also fortunate to have a significant base of paying subscribers, which
makes it easier for us to write in-depth pieces that might not generate enough
revenue from ads alone.

~~~
TekMol
Hey, great to meet the author on HN!

First of all, let me say that I liked the article. I am the one who posted it
to HN after all.

Maybe "short" was not the perfect word to express what I mean. I mean that the
message/idea is kind of short. It's almost like a showerthought "See this
chart? It looks like they are in the red all the time. But think of it this
way: They build success after success. They could have been profitable ever
since Model S. But they keep investing in bigger projects instead.".

Interesting, that the revenue is significantly higher then $0.001 per visitor.
Because it looks like the main ad spots are filled with Google Ads. Which I
run too. Do advertisers really target specific sites manually via Google Ads?
I would have thought they do that algorithmically based on demographic
factors.

~~~
binarybits
Mainstream news sites aren't going to give you the kind of super-deep insights
you're going to find in academic research or trade press or whatever. 90
percent of any site's audience knows very little about any given topic, so
laying out obvious-to-insiders ideas in a clear way is a significant value for
the average reader. Ars readers are more technically savvy than most sites but
most of them are not experts on corporate finance.

I do not know very much about the specifics of Ars's ad sales strategy. I
would guess Google pays more to established sites. Also, if you're seeing a
Google ad that might be because they didn't have a higher-paying direct-sale
competitor for that particular impression.

------
PeterMikhailov
I will wait until Matt Levine analyzes what happened.

------
amluto
There is nothing in this article that suggests any error in the naysayers’
reasoning. None of the analysts were so dumb as to say that Tesla’s massive
capital expenditures should be instantly depreciated and were thus worthless.
The issue had always been cash flow: Tesla’s cash flow was negative enough
that there was a serious risk that they would run out. Fortunately, they seem
to have turned the corner without running out of cash first.

I think they still have considerable risks ahead:

\- All the Model 3 cars they’ve recently sold represent potential liabilities
for repairs. My neighbor’s has spent weeks in for repairs due to poor QC, and
is probably a lemon under CA law. Even ignoring the lemon law, warranty
repairs are expensive.

\- To be worth their valuation, they need to sell massive numbers of cars for
quite a few years. In particular, they need to continue leading after their
competitors introduce serious EVs. Having driven Teslas and other cars, Teslas
have a lot to be desired in terms of interior amenities and controls.

\- The NTSB is investigating an autopilot fatality. The liability from that
particular fatality is irrelevant to Tesla, but the NTSB could plausibly force
a recall of Autopilot. That would be bad for Tesla. (And arguably quite good
for transportation safety.)

------
AllegedAlec
I'm not sure I'm sold on the perspective that the worst Tesla detractors were
actually just misinformed or wrong about the subject, rather than being
actively malevolent by trying to gain money by shortselling while funding
anti-Tesla articles.

~~~
ericb
Under current rules, I'm pretty sure it is legal to try and destroy a company
by destroying its reputation and maligning its financials and profit by
shorting it while you kill it.

That this is allowed seems anti-competitive and takes away from the notion
that shorts "make a market healthier by bringing balance."

~~~
AllegedAlec
> Under current rules, I'm pretty sure it is legal to try and destroy a
> company by destroying its reputation and maligning its financials and profit
> by shorting it while you kill it.

Yeah, it's legal, but that doesn't mean it's not malevolent.

~~~
ericb
I think we're in agreement about everything including its malevolence.
Destroying otherwise healthy companies does nothing beneficial for the
country's competitiveness, so if it could be done carefully, I'd support laws
reigning this behavior in.

------
apo
Tesla in its current form has never had to weather an economic downturn. It
will be subject to the same headwinds as any luxury manufacturer. Unlike other
car companies that sell luxury, Tesla has no economy model.

Some commenters have noted that they can easily afford the price tag. It might
be time to consider the transitory nature of that situation.

Tesla is an amazing company, (because/but) it has put all its eggs in one
basket.

~~~
leesec
What are you talking about? Tesla was founded in 2003, and did in fact have to
stomach the major economic downturn in 2008. Was not a great time to be a car
company, especially a small start up.

~~~
didndkdk
2008 occurred when TSLA was insignificantly small. Most had never even heard
of it, and they started selling the roadster in 2008 - by 2012 they sold 2200
cars.

Point being they were small enough that a couple of investors, or Musk by
himself, can support the company through the storm.

If the financial crisis would hit today, Musk couldn’t keep it afloat by
himself for long and would have to raise serious amounts of capital to keep a
company its size.

So no. Tesla, as a serious car company, has yet to live through a financial
storm. Not as anything other than a niche vanity project.

~~~
apo
Exactly.

------
jgalt212
Sure the math works out so long as each newer and more expensive
project/product is well received by the marketplace. That being said, how many
times can you bet the company before the coin comes up tails?

If the coin never comes up tails, then TSLA is worth an infinite amount of
money. If the coin eventually comes up tails and each project is bigger than
the previous one, ruin awaits.

[https://en.wikipedia.org/wiki/Gambler%27s_ruin](https://en.wikipedia.org/wiki/Gambler%27s_ruin)

------
jandrese
IMHO the flood of negative Tesla stories over the past few months has been an
incredibly successful stock manipulation scheme. These people just got a huge
payday when the Tesla earnings report dropped. It's up something like 75
points. Bloomburg is news for suckers.

Another factor is how quarterly earnings reports mean the investment media
can't look past the end of their own nose. Obviously a company that is making
a massive infrastructure investment to fill thousands of orders already on the
books is going to have a cash shortfall in the short term, but it's a
temporary problem and the long term prospects are quite rosy.

I mean these are the same people who every single day try to explain 1%
upticks/downticks in stocks where the change is clearly below the noise floor.
It's not being made for smart people.

------
11thEarlOfMar
Because a lot of hedge funds make their money on volatility, not growth. They
take advantage of the media's need to sell Fables rather than Facts, and
jeopardy is an effective plot device.

~~~
nemild
In that vein, I'm looking for contributors to my financial media literacy
guide:

[https://github.com/nemild/hack-the-
media/blob/master/financi...](https://github.com/nemild/hack-the-
media/blob/master/financial-media-guide.md)

It's a new version of my broader software eng media literacy guide:

[https://github.com/nemild/hack-the-
media/blob/master/softwar...](https://github.com/nemild/hack-the-
media/blob/master/software-engineers-media-guide.md)

------
empath75
I’m skeptical that those are legit numbers and not just the result of pushing
off payments to suppliers and booking revenue for cars they haven’t shipped
yet.

~~~
greglindahl
Tesla books revenue when they deliver cars to buyers, not when they ship them.

------
jason46
I live in northern Mi, I see Tesla's everyday, and I don't think they can be
bought in MI, so despite the inconvenience they are moving cars.

------
casper345
Heard a great quote (gonna butcher it) - "What people say or what competition
is doing at the end of the day does not matter - if the forces allow, it will
allow".

