Tesla May Not Survive the Summer
Is luck running out for our favorite whipping boy?... Musk's troubles come to a head... Tesla may not survive the summer... In the mailbag: How to buy silver and more on the Porter vs. David A. 'debate'...
Editor's note: The Stansberry Research offices will be closed tomorrow for Good Friday. We'll resume our normal publishing schedule on Monday, April 2.
Is luck running out for our favorite whipping boy?
Longtime readers know we're no fans of Tesla (TSLA). In fact, Porter has been an outspoken critic of the electric carmaker since June 2014. We reviewed the bearish case when we checked in on the company last fall. From the October 3 Digest...
As we've explained many times, it's not that we have a problem with the electric carmaker's products. Rather, it's CEO Elon Musk's questionable ethics, and the fact that it's simply a terrible business.
Tesla (TSLA) has missed virtually every manufacturing deadline and sales target it has ever set. It loses money on every car it sells, despite forcing taxpayers to subsidize a huge portion of the cost. It has burned through nearly $10 billion since 2012... holds another $10 billion in debt... and has never turned a profit. And yet, somehow, we're supposed to believe the company is worth more than $56 billion today.
In that Digest, we also noted that the company was facing new headwinds...
Automakers like Volkswagen, Porsche, BMW, Mercedes-Benz, and many others are now entering the electric-car market in a big way. Tesla would soon face stiff competition for the first time.
Meanwhile, the company had continued to miss its insanely optimistic production targets. At the time, Musk was forecasting 500,000 units of its new Model 3 sedan would be produced in 2018, growing to 1 million per year by 2020. Never mind that the company was producing these cars at a pace of less than 1,500 per year at that time.
Later that month, we noted that Tesla had suddenly fired 400 employees. The company initially claimed the layoffs were due to performance. But as financial-news network CNBC noted at the time, most of the people who were let go were highly paid employees from the motors business... suggesting Tesla was slashing costs just months after raising another $2 billion in company's first-ever junk-bond offering.
Unfortunately for Tesla investors, the situation has not improved since...
And this week, the company's troubles may have finally come to a head.
It began with yet another report of a fatal accident in one of its vehicles. On Friday, a man died in Silicon Valley when his Tesla Model X sport utility vehicle struck a barrier and burst into flames. The National Transportation Safety Board has launched an investigation – its second investigation of a fatal Tesla crash in less than two years.
That news broke just a week before Tesla is expected to report on first-quarter production and deliveries. If history is any indication, the company won't come close to hitting its targets. Bloomberg estimates Tesla is closer to delivering 975 cars per week – well short of the 2,500 units the company had targeted by the end of the quarter.
On Tuesday, ratings agency Moody's Investors Services downgraded Tesla's overall rating, to "B3" – six levels below investment-grade – and gave the company a negative outlook. Moody's also slashed the rating on the company's recent $1.8 billion debt offering to "Caa1," deep into the junkiest of junk-bond territory.
The reasons cited should sound familiar to Digest readers. As Moody's analyst Bruce Clark noted in the report...
Tesla's ratings reflect the significant shortfall in the production rate of the company's Model 3 electric vehicle. The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities.
After ignoring the company's obvious problems for years, the market is suddenly taking notice...
Tesla shares have been in freefall. They fell more than 8% on Tuesday following the news, to close at their lowest level in nearly a year. They fell an additional 8% yesterday, pushing the stock down almost 25% over the past month alone.
Even more concerning, the bond market is now taking notice, too. The company's debt is now trading at a significant discount to par. As Bloomberg reported yesterday...
Elon Musk's creditors are suddenly having a serious bout of buyer's remorse.
In August, they lined up for the chance to finance Tesla's ambitious rollout of its Model 3 sedan. Wooed by Musk's personal appeals, bond investors pretty much ignored the carmaker's prolific cash burn and repeated failures to meet production targets and lent it $1.8 billion at record-low interest rates.
But now, after a spate of fresh setbacks in the past week, including a fatal Tesla crash and a credit-rating downgrade, bondholders are asking hard questions about whether Musk can deliver on his bold promise to bring electric cars to the masses before the company runs out of cash. On Wednesday, Tesla's notes plunged to a low of 86 cents on the dollar, the clearest sign yet creditors aren't totally sure the company will be money good.
Of course, it's still too early to say whether this is actually the beginning of the end for Tesla...
Musk has admittedly been able to keep this ruse going far longer than we believed possible. But as Stansberry Research senior analyst Mike DiBiase told us in a private e-mail earlier this week, things certainly don't look promising right now...
Tesla is burning through cash at an alarming rate, to the tune of $3.5 billion last year alone... But the company only has $3.4 billion of cash on hand, and another $900 million of debt coming due next year. Just to keep the lights on for another year, Tesla will have to borrow more money or issue more stock.
Musk can only tap the debt and equity markets for so long... And with the recent credit downgrade, taking on debt will be more expensive. It will likely issue more convertible debt, which dilutes shareholders.
Tesla's only hope of surviving is that the Model 3 is a runaway success... and fast. But as we've seen, it can't hit any production deadlines. If the Model 3 doesn't generate the massive revenue and cash flows that Wall Street is expecting, Tesla shares will plummet.
What's the worst-case scenario?
According to noted Tesla bear John Thompson – CEO of Vilas Capital Management – the company may not even survive the summer. As he wrote in his latest letter to investors last week (emphasis added)...
I think Tesla is going to crash in the next 3-6 months.
[This is] partially due to their incompetence in making and delivering the Model 3, partially due to falling demand for the Model S and X... partially due to the extreme valuation... partially due to their horrendous finances that will imminently require a huge capital raise... partially due to a likely downgrade of their credit rating by Moody's from B- to CCC (default likely) which should scare their parts suppliers into requiring cash on delivery (a death knell)... partially due to the market's recent falling appetite for risk... and partially due to our suspicions of fraudulent accounting activities, evidenced by 85 SEC letters/investigations and two top finance people leaving in the last month.
We are doubtful that they can raise a meaningful sum in the face of these material issues... Tesla, without any doubt, is on the verge of bankruptcy.
New 52-week highs (as of 3/28/18): KraneShares E China Commercial Paper Fund (KCNY) and short position in Sprint (S).
In today's mailbag, a new subscriber has a question about purchasing silver... and the feedback on Porter's must-read mailbag response continues to pour in. Apparently not everyone was impressed. Let us know what you thought at feedback@stansberryresearch.com.
"In yesterday's Digest, Justin suggested buying physical silver as the price/value relative to gold is quite cheap. What is your latest recommendation as to how and where to buy physical silver? Thanks." – Paid-up subscriber Bob L.
Brill comment: We get this question a lot. In short, when buying physical gold and silver bullion, there are two important considerations to keep in mind.
First, there are unscrupulous dealers out there, so you want to be sure to buy from someone you can trust. On the other hand, bullion is bullion, regardless of where you buy it. You're simply buying a commodity, so it makes no sense to pay more than you have to. Feel free to shop around for the lowest premiums over the "spot price" of the metals possible.
We don't have formal relationships with any dealers, but we can recommend the following companies...
Camino Coin
1301 Broadway Avenue
Burlingame, CA 94010
Phone: 800-348-8001 or 650-348-3000
Fax: 650-401-5530
E-mail: parker@caminocompany.com
Website: www.caminocompany.com
Gainesville Coins
17860 N. U.S. Highway 41
Lutz, FL 33549
Phone: 813-482-9300
E-mail: sales@gainesvillecoins.com
Website: www.gainesvillecoins.com
And if you're interested in rare (or "numismatic") coins in addition to bullion, we'd also suggest contacting Van Simmons at David Hall Rare Coins...
David Hall Rare Coins
P.O. Box 6220
Newport Beach, CA 92658
Phone: 800-759-7575 or 949-567-1325
E-mail: info@davidhall.com
Website: www.davidhallrarecoins.com
We receive no compensation for recommending any of these dealers. They've just treated our customers and colleagues well over the years.
"'War is an ugly thing, but not the ugliest of things: the decayed and degraded state of moral and patriotic feeling which thinks that nothing is worth a war, is much worse. When a people are used as mere human instruments for firing cannon or thrusting bayonets, in the service and for the selfish purposes of a master, such war degrades a people. A war to protect other human beings against tyrannical injustice; a war to give victory to their own ideas of right and good, and which is their own war, carried on for an honest purpose by their free choice, — is often the means of their regeneration. A man who has nothing which he is willing to fight for, nothing which he cares more about than he does about his personal safety, is a miserable creature who has no chance of being free, unless made and kept so by the exertions of better men than himself.' – John Stuart Mill, Principles of Political Economy
"Why do I cite this quote? It strikes me that your stance and comments to David A. typify that miserable creature of which Mill writes. You seem to stand for nothing except your bank account despite the fact you, to put it in the vernacular of your mentor, are a zombie like every other American citizen who has benefited from whatever vestige of the American republic still exists. You are an 'arm-chair quarterback' who loves to tear down what you disagree with, but does nothing to attempt to remedy what is wrong. And that is a miserable creature that deserves neither love nor hate, but only to be ignored." – Paid-up subscriber Paul H.
"Great to hear so many readers appreciated Porter's response to David A. I'd like to add that anyone who wonders about the origins of coercion need only look to David A's note to Porter. Not content to 'till his own soil', David takes it upon himself to investigate Porter's level of 'gratitude', judges it inadequate, and imposes a 'sentence' of public shaming to urge him to rehabilitate himself according to David's decrees. No wonder David loves government." – Paid-up subscriber Maureen M.
"I have been a paid-up subscriber for over 9 years and got to say this response by Porter to David A was one of the best I have read. Porter you and your staff have given me a chance to retire well, a chance I barely had before reading your newsletters. I continue to appreciate [Stansberry Research] investment subscriptions and how you tell your truth about America, a truth I agree with. Keep up the excellent work." – Paid-up subscriber Kurt J.
"Porter, my computer put the Digest with the David A. mailbag discussion into the 'spam' folder (I've long suspected it of duplicity) so I didn't see it until today. Your reply is amazing – the best, most concise and cogent discussion of where we are as a society and how we got there that I've seen anywhere. That reply alone is a gem worth the price of subscription many times over, and I consider your advertised purpose of providing financial information to be quite well fulfilled. I hope David seriously considers the questions you pose there. I'm sure that even if he doesn't, many other readers will be given pause for thought. Best regards as always and thank you!" – Paid-up subscriber Jim H.
"Porter, your response to David A. was the most meaningful and eloquent piece of prose that I might have ever read. I forwarded it to all my friends and family. I wish that I had the ability to express my thought in that manner. It alone is worth my Alliance membership." – Paid-up Stansberry Alliance member Jon H.
"Bravo Porter. Your comments are so on point. Those of us that have independently read the Federalist Papers, The Declaration of Independence, and the Constitution have to be in awe of the Founders and their wisdom. Our current government leaders (both parties) couldn't be more different than our Founders. So disappointing and sad. Who is John Galt? Could it be Porter Stansberry?" – Paid-up subscriber Dave B.
"Porter, it would take me a month to put together such an eloquent response to David's 'accusations' of who you are and what you think, and even then I would not bring it together as succinctly. Thank you for answering precisely how I would recapture my own experience." – Paid-up subscriber Betsy B.
"Your response to David A. says a lot about you and your philosophy. After reading, re-reading and digesting the wisdom of your comments it's not a surprise that you have built a successful company. I am proud to be one of your subscribers." – Paid-up Stansberry Alliance member Bill M.
"One reader recommended Porter for president. I personally don't want to see Porter become the next clown to sit in the dunk tank – which is essentially what the White House or Capitol Hill has become – so I'd suggest Porter write the next history book our public schoolers read. Maybe we'll have fewer 'Occupy ______' or 'March for ______' events and the younger generation can actually show up the older ones up in the correct way instead of being chastised for needing trophies, therapy dogs, and adult coloring books. And, I wouldn't know what to do if I heard the average teenager today say that FDR didn't save the world and that Keynesianism is a hoax.
"Until then, I highly recommend everybody read Richard Maybury's 'Uncle Eric' series which has similar echoes to Porter's response, my wife and I enjoy them and they are required reading for when our young children are old enough to understand the message." – Paid-up subscriber Josh P.
Brill comment: We couldn't agree more, Josh. We believe Richard's Uncle Eric series should be required reading in every school in America. Interested readers can learn more about these excellent books on Richard's website right here. Again, we receive no compensation for recommending them. We're just big fans of his work.
Regards,
Justin Brill
New Orleans, Louisiana
March 29, 2018