In the grand scheme of things, it was a little surprising that shares of Tesla Motors Inc (NASDAQ:TSLA) didn’t get hit harder after posting disappointing fourth-quarter results after the market closed Wednesday.
However, despite a decent-sized crowd of TSLA fans and followers potentially keeping a bigger drop-off at bay Wednesday night, Tesla stock looks to open considerably lower this morning.
Thing is, much of today’s discussion surrounding TSLA’s declines today likely will center around Tesla earnings for the fourth quarter. The problem: That discussion may well be distracting investors from a much more troubling red flag regarding the company’s future.
Fourth-Quarter Tesla Earnings
Last quarter, TSLA reported a net loss of $107.6 million, and an adjusted loss of 13 cents per share, on $956.7 million in sales. The company sold 9,834 vehicles — the Model S — in Q4 2014, and built a total of 11,627.
It all (basically) compares favorably to the year-ago figures, when Tesla generated revenue of $615.2 million by selling 6,892 of its uber-cool electric vehicles. Even the swing to a loss from the year-ago profit of 33 cents per share was treated as a bigger problem than it really was. Gross profits were up 67%; a surge in R&D expenses and selling/administrative expenses drove the deeper dip into the red ink.
Yet, there is plenty for Tesla stock holders to be concerned about here. It just doesn’t show up on the income statement or balance sheet.
TSLA Sales Staff in China Isn’t the Problem
It was only on the radar for a few short hours on Wednesday before earnings news superseded it: Tesla CEO Elon Musk isn’t pleased with sales in China, so much so that he’s threatening to fire employees charged with marketing the company’s electric vehicles there if numbers don’t improve soon.
The specifics: After Tesla sold only 120 EVs in China last month versus a target of 500, Reuters confirmed that Musk wrote in an internal company memo (presumably not meant for outside eyes) explaining that poorly performing managers in China “will be asked to leave or assume a more junior role.” The same email went on to explain, “This has already happened in China and will likely happen in some other countries, too.”
Musk downplayed the harsh tone of the message in Wednesday evening’s conference call, and others have simply chalked it up to the typical strong language often used by forceful, driven people who are passionate about their product.
There’s no real way of sugar-coating it once it’s already out there, though — Elon Musk is holding TSLA employees’ jobs over their heads, demanding results. Owners of Tesla stock may want to take note of the attitude.
On the surface, it simply seems like a “jerk-like” thing to say from someone who’s known on occasion to be … well, jerk-like. Under the surface, however, it reeks of frustration and desperation. Is he realizing that his next land of opportunity — China — isn’t going to live up anywhere near his expectations? If so, that could be a problem.
And as it turns out, it might already be a problem.
Most owners of Tesla stock know that its former China chief Veronica Wu left the company in December, most likely because of tepid sales results up until that point. What most TSLA investors may not recall, however, is that in January 2014, Wu was expecting China to drive about a third of the company’s global sales for all of last year — a proportion likely supported by Musk. The actual proportion has been nowhere near that level.
As Musk put it in January when dropping some early hints about Q4 results, Chinese revenue “was not a significant contributor to our sales.”
He wasn’t kidding.
Bottom Line for Tesla Stock
None of this is to say Tesla is doomed, in China or anywhere else. It is interesting to see this particular side of Musk that we’ve never seen before, though. In fact, some of it looks eerily familiar to Elisabeth Kubler-Ross’s so-called five stages of loss and grief.
In her 1969 book “On Death and Dying”, the psychologist noted that most individual deal with the death of a loved one by proceeding through five distinct stages: (1) denial and isolation, (2) anger, (3) bargaining, (4) depression and (5) acceptance.
Given Musk’s tone and message regarding China’s sales efforts, it looks like he’s somewhere between stages two and three.
The anger comes in the form of the decision to demote or fire some managers for poor sales in countries other than China. The bargaining is the deal he’s offering Chinese employees — they can keep their jobs if they produce numbers he likes. Apparently he’s already progressed through stage one of the process, denying the possibility that maybe, just maybe, Chinese consumers aren’t falling in love with the vehicle the way U.S. consumers have.
And no, availability and deliverability can’t explain why sales in China never measured up to expectations. Moreover, if it’s a cultural issue as some Chinese auto industry experts suspect, Tesla may never get over that hurdle.
All of a sudden, Tesla has become fallible. It’s not necessarily a reason to dump Tesla stock. With such high hopes for China being dashed, though (and apparently not just in China), it might be a reason to take TSLA off its pedestal.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.