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  • KPB & Co Research

Synopsis

Tesla's stock price has been on steady decline since mid 2017 when it hit an high of US$383.51 per share. On its journey down to US$261.4 per share the company has been subject to a number of accusations of accounting impropriety and misleading CEO comments. To be fair a lot of those accusations come within the context of erratic tweets by founder and CEO Elon Musk - which actually led to law suit by the US SEC -  and a number of missed deadlines for the ramp up in production of the model 3. This has lead many to question, is this company going bankrupt.  While many might be in support of bankruptcy, but the company still has a massive base of customers looking for the product.

Short Sellers on the Offensive

Famed short sellers such David Einhorn had issues with the way how Tesla's accounts receivable and costs were being managed. Particularly, the hedge fund manager had concerns about the view touted by Tesla'a management that its cars are the safest available, that its driver-assistance system (Autopilot) is safe . There is also the view that the company's Chief Executive Officer Elon Musk is overstating how much demand there is for the Model 3 sedan. Legendary short seller, Jim Chanos, seems to think that Elon Musk's decision to to make luxury versions of its Model 3 -  a car originally slated to cost US$30k but will now cost US$60k- is a mistake that will eventually prevent the company from achieving the scale needed to get to cash flow breakeven. 

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Who will be proven right

A purely high level view suggests that a Tesla bankruptcy is a couple years out based on the fact that people love their cars and that the possibility of a refinancing is real. Though Tesla continues to burn through cash at a rapid pace, there is enough room there to keep the lights on. At the end of March 2018, Tesla had US$2.7Bn in cash, and debt of US$8.8 Bn. The weighted average tenor of the debt was 7 years. The cash used to operate and invest in growth increased to US$4.5Bn last year, as the company buys the equipment needed to scale up. Whether the company goes bust depends on whether the investment that they are making today will enable them to meet the pent up demand for their cars within 2 or 3 years. Cash used in operations have been declining steadily, and the massive capex investment last year is likely nonrecurring. 

Conclusion

There are indications that the stock maybe overvalued, as a lot of the company's potential is already priced-in. As it relates to bankruptcy, that appears to be a 50/50 bet.​ The company is not in immediate need of Cash and there is the possibility that as the debt comes due it could be refinanced if the market remains receptive to company's perceived potential. There is also the issue of how much information can be gleaned about the company from its financial statements. Given the rapid rate at which changes are being undertaken in the company, the financial statements as they appear now is almost completely irrelevant to where the company will be in the near term.


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