As the bull/bear argument over Tesla Inc (NASDAQ:TSLA) intensifies, the debate increasingly focuses on the company’s financial targets. TSLA stock gained last week after the company’s second-quarter earnings report because its performance impressed. The longs were comforted by the projections laid out by CEO Elon Musk on the post-earnings conference call.
As I’ve written before, Tesla stock is a battle over what profits will look like next decade, and beyond. And that debate inevitably hinges on the direction of the current path.
It’s there that the divide between bulls and bears is most apparent.
Bulls see steady progress toward a revolutionary future, where Model 3 and Model Y cars are powered by SolarCity roof panels and profitable, Tesla-owned, Supercharger networks … all fueling outsize gains in TSLA stock. Tesla bears see a history of overpromising and underdelivering. To bulls, Musk is no less than a visionary, and perhaps the greatest of his time. To many bears, Musk is a modern-day snake-oil salesman, whose grandiose dreams do not, and will not, match up with economic reality.
Coming out of second-quarter earnings, and in the wake of Tesla’s new debt offering, the divide has never been larger. Which side an investor chooses makes Tesla stock look like the opportunity of a lifetime … or a bubble simply waiting to deflate.
Tesla Raises Debt Instead of Selling Stock
“There may be some wisdom in having a cash cushion for unexpected events…It could be an earthquake in California, for example. But we’re not at this point considering an equity raise. We are thinking about debt, but we’re not thinking about an equity raise.”
The bulls probably don’t see much wrong with this quote. Musk said the company wouldn’t sell more stock, which dilutes existing shareholders. And Tesla didn’t, instead looking toward what appears to be its first non-convertible debt offering.
To bears, however, the quote says a lot.
Musk said on a Wednesday call that the company was “thinking about debt.” It announced the offering five days later. To a skeptic, there’s simply no way that TSLA was “thinking” about an offering when Musk spoke. Rather, it had to have been very far into the process to announce the offering basically two business days later.
As for the debt itself, it too can be seen in different ways. The fact that TSLA stock isn’t on offer likely is a good thing. Nearly all Tesla investors would rather issue debt at a likely 7%-9% interest rate rather than sell shares below their fair value.
On the other hand, Musk had said on the Q3 call last October that “our current financial plan does not require any capital raise for Model 3 at all.” But Tesla sold shares and convertible debt in March, as feared, and now is raising another $1.5 billion or so. As seen above, Musk framed the raise as necessary for “unexpected events.”
But with capex in the second half alone guided to $2 billion, Tesla would need the cash eventually.
To the bears, Tesla’s capital plan is yet another broken promise.
Do Broken Promises Affect TSLA Stock?
Of course, the most pressing question for Tesla stock is: does it matter? Almost exactly a year ago, the Wall Street Journal detailed the endless series of missed targets at Tesla over the years. Bear mind the Model 3 originally was supposed to be launched at the end of 2014, not 2017. Delivery and production goals similarly have been far too aggressive — and repeatedly.
Of course, few investors have cared so far.
TSLA stock has gained 55% in the last year, adding ~$20 billion in market value in the process. But that may change for Tesla, particularly over the next 18 months. The Model 3, and its move into ‘mass market’ sales, represents the most significant step Tesla has taken as an automaker so far. Musk’s comments on the Q2 call set very ambitious goals for the next year and a half.
Musk said “people should absolutely have zero concern” about a 10,000-unit-per-week production rate by the end of next year. He reiterated the company’s “commitment” to its second gigafactory in Buffalo, even though progress there appears to be below that promised to New York State at the time of its announcement. It’s “100%” sure that Tesla will post 25% gross margin next year — even though similar rates at Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are in the high teens. And the first cross-country autonomous drive will be at the end of 2018, as promised — or “it will be very close.”
I see a lot of promises there. Will Tesla keep them this time?
Is This Time Different?
If Tesla stock one day will be judged based on its targets — as hasn’t happened yet — then the next 18 months look exceedingly important. And Tesla’s own history suggests that at least of the promises made last week will be broken. Of course, that same history suggests that investors in Tesla stock simply won’t care.
Thus, the argument over TSLA stock rages on.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.