Tesla is running out of road – and so are the other big tech stocks

Elon Musk © Getty Images
Elon Musk: suddenly finding it hard to raise money

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It’s funny how nothing matters in markets until it does.

Electric car giant Tesla has essentially regaled its investors with an unending litany of delays, fundraisings and broken promises since it went public.

No one minded. The share price kept going up.

Then you get a bit more bad news – a US regulator looking into a fire in a Model X that crashed in the US last week, plus growing competition – and it doesn’t seem different, quantitatively, to anything that came before.

And yet, suddenly, everyone cares…

The big market warning sign that Tesla is in trouble

I get why people like Tesla.

The goal of the company is admirable, the products desirable, the founder blessed with a sort of anti-charisma that works wonders. There’s an echo of Apple and Steve Jobs there that would be more than enough to attract your average iPhone-blinded tech investor, with few questions asked.

But even the sturdiest Tesla fan has to admit that, whatever else it has achieved, it has proved to be one of the most efficient cash incineration machines ever designed.

And this time, it’s looking harder for Musk to talk his way out of it.

You see, rating agency Moody’s took an axe to Tesla’s credit rating on Tuesday. Moody’s reckons that the fact that Tesla isn’t producing cars fast enough, and is burning through cash means there’s a big risk that it’ll have to raise another couple of billion dollars or so in the near future.

Throw in the investigation into a crash in California (investors are now worrying about Tesla’s autopilot and whether it will retain its lead on self-driving cars), and wider jitters in the market – particularly in tech stocks – and it’s a toxic combination for a stock that’s been running on fumes for a while.

As Liam Denning points out on the Bloomberg Gadfly column, it’s not Tesla’s shares you really need to watch, but its bonds. Tesla’s benchmark bond – which matures in 2025 – now yields more than 7%. That matters, because it represents the biggest gap between Tesla’s yield and the yield on US government bonds (the risk-free rate) seen yet.

That widening “spread” means that bond investors see Tesla as a lot riskier than they have in the recent past. In other words, they are demanding a much chunkier extra yield to compensate them for taking the risk of lending their money to Elon Musk rather than the US government.

(From Musk’s point of view, you could argue that it’s quite an insult to realise that people are less worried about being stiffed by Donald Trump, a man well acquainted with bankruptcy, than they are about losing money to Musk.)

Worse still, though, Tesla now pays a bigger yield than that offered by the bonds of many of its peers. The average company on the same credit rating is being charged less to borrow now than Tesla is – the opposite was the case just a few months ago.

Next week, the company updates on its first quarter. And who knows? Musk might pull a flying car (as opposed to a rocket car), a self-burrowing hyperloop system, or a solar-powered self-cleaning house out of his back pocket. He might even upgrade the production figures.

But it’s going to be a lot tougher for him to raise more money in an environment that is suddenly rather more unforgiving than it has been in the past. Particularly given that it needs to refinance $3.7bn by the end of 2020.

When interest rates rise, investors get more picky

You can tell a great story and you can run on optimism and fear of missing out (FOMO) for a very long time. That last aspect – the FOMO – is particularly powerful.

Nothing is more likely to disturb your peace of mind during the good times than the sight of your neighbour or work colleague making more money than you. “Look at all these stupid people making money! I’m smarter than they are! Why am I not making more money?” That often encourages short-term decision making (that’s the polite term for it).

But there’s a time limit on that. At some point you have to deliver. That time limit has taken a lot longer to arrive than perhaps anyone could have expected.

That is almost certainly down to the deep-freeze atmosphere that the economy was plunged into with near-global zero-interest rate policies and quantitative easing. In that world, it wasn’t hard to raise money because money was so incredibly easy to come by, while better opportunities for growth were very hard to come by. Bankruptcy risk was reduced to virtual non-existence.

That situation is changing, slowly but surely. That’s fundamentally the reason that not only Tesla, but other “if you build it, they will come” propositions – streaming service Netflix, for example, and quite possibly cryptocurrencies – are suddenly running into investor scepticism.

Our regular contributor Jonathan Compton looks at why it’s time to get out of the FANGs in this week’s issue of MoneyWeek, out tomorrow. Don’t miss it – sign up to MoneyWeek now.

  • Careful John! Don’t treat Tesla like any other company. I and other Tesla fans don’t give a damn about any other listed companies – because companies listed on the stock exchange don’t give a damn about me. In fact, they don’t give a damn about anybody other than their shareholders. That, sadly, is a sad state of affairs and not an overly dramatic statement. Shareholders (normally) come first.

    However, Tesla I care deeply about. Because it is on a genuine mission to accelerate the world’s transition to sustainable energy. That is extremely important to me. I really don’t give a damn about other car companies – in fact, I blame other car companies for our current climate predicament. They’ve done very little or nothing to wean us off fossil fuels.

    Tesla is different. Elon didn’t want to build a car company. Nobody in their right mind would want to build a car company! But he recognised – like many of us – that motor manufacturers had to change and that they were not going to change unless their very raison d’etre was threatened.

    I will wholeheartedly support Tesla until I die, as long as they continue in their mission. They are the only major car manufacturer that actually gives a damn about the environment and thanks to Elon, they are already building the best cars on Earth. Once they get volume manufacturing sorted, they’ll be flying along.

    The only car I want is a Tesla. I car nothing for any other car manufacturer. Nothing. And I’m not alone. Young people are hungry for change. We see traditional car manufacturers as the problem. We see Tesla as the solution. Just because they are taking their time to perfect Model 3 doesn’t mean we abandon Tesla. Quite the opposite – we respect them for doing things right.

    Please – don’t fight it. You, me and everyone else needs to solve climate change and at the same time, we can enjoy some fun new technology. It’s a win-win. Tesla is pure goodness, because for once, an entire listed company is working for good of humanity and planet Earth (which just happens to be good for its shareholders too).

    • Richard Tavener

      I couldn’t disagree more ! Whatever Elon’s motives – and they might well be admirable – it can’t detract from his lack of financial acumen and failure to recognise that he can’t forever tap the market for funds as his credit rating sinks. IMHO, Tesla has all the hallmarks of an imminent disaster, both for itself and, therefore, its stakeholders. EVs will ultimately flourish even if Tesla disappears.;

      • Tesla can tap the market for as long as investors believe in Tesla. And many people – investors and customers – deeply believe in Tesla. They will stick with it through thick and thin. It’s an inspirational business that is doing the right thing. We’re totally fine that its taking them longer than they hoped to get into high volume Model 3 production. Better that they do it right rather than do it rushed.

        • Richard Tavener

          Hello Jake,

          I agree with you that many people have blind faith in Tesla and that the company is undoubtedly the flagship for EVs. However, I wonder how many realise the dire state of Tesla’s finances – net loss in calender ’17 of $2bn, negative cash flow of $4bn, debt of c$10bn and equity of just $4bn v liabilities of c$25bn. You may say that believers don’t care but they certainly should ! The company has repeatedly issued new shares to plug the cash flow hole and must continue to do so for years to come. Fine if all the believers are prepared to stump up the cash and suffer the inevitable dilution but there must come a time when enough is enough whilst raising more money via extra debt will be increasingly difficult given the downgrades from credit agencies and rising interest rates.

          According to Forbes, Mr Musk’s net wealth is c$19bn but I’m sure that figure includes his 25% in Tesla at a higher price than the current $266 ( 52 week range 390 – 248 ). He may well have to dig into this to help the company survive, let alone grow, also bearing mind his ambitious Space X programme – large development costs without any revenue for years to come !
          From an outsiders” view, the risk / reward ratio hardly looks compelling and if one looked at the fundamentals without knowing to which company they applied, you wouldn’t touch the stock with a barge pole !!

          Richard Tavener

      • Thomas

        Jake Brumby is obviously trolling.

        • I’m just an average Tesla fan. I care about the environment and I care about businesses doing their bit to help solve climate change, deforestation and pollution. Actually, I think businesses have a very important responsibility to at least “do their bit”. Anyone that has been following Tesla and Elon for a while will understand how core sustainability is to their values. Tesla cares so deeply about this that they are pioneering the switch from fossil fuels and renewables and they will not stop until the job is done.

          By all means, short Tesla, but do so at your own financial peril because this is a company that is likely to be worth 10 times as much in the future as it is now.

          Dominique Frisbee (top bloke, incisive and highly intuitive Money Week) has recommend shorting Tesla before at about $220. He was spot on, because it fell to $180 in the next few weeks but for the next 18 months beyond that (and until now) you’d be nursing losses. You’ve been warned – Tesla is no ordinary company. It actually cares about doing the right thing, in an ancient industry that doesn’t give a damn about the environment. Tesla is likely to win and there’ll be many losers.

          • Thomas

            I am not shorting anything. (I’ve literally never shorted anything in my life, I have invested in stocks however, never of any car companies though.)

            I just found many of your statements ridiculous, such as Tesla being the only one doing something about environmental issues etc. (and caring lol). Shame that caring doesn’t extend to it’s employees.

            I mean what about Toyotas hybrids? They were a success because they saved people money. And incidentally according to your logic helped the environment because they used less gasoline. And I mean, the history of the electric car hardly starts with Elon Musk.

            And there is still a discussion if the electric car even cuts down on greenhouse emissions. (They are just moved really). Battery production is hardly clean either, and create worse emissions compared to CO2. (That is if we accept man-made climate change to begin with).

            Chinas environmental issues do not stem mainly from coal mining, but other types of mining, the results of which are used in solar panels and batteries, among other things.

            And isn’t Elon Musk still the guy that sent his car into space just for fun? How was that good for the environment? Are emissions okay if it’s from such important things as sending cars into space?

    • JaneMorris

      But it’s a lie.

      If you have a high proportion of fossil fuels in the electricity generation mix combined with the carbon cost of producing the huge battery pack then your tesla is no better, maybe worse for the planet than an efficient ICE car.

      But I know cult members will never be swayed. Tesla allows wealthy would-be buyers of luxury performance cars to appease their consciences.

      • You’re only tricking yourself, Jane. How do you expect humans to wean themselves off fossil fuels if the only vehicles on the road are powered solely by fossil fuels? Of course we need electric vehicles (and/or hydrogen powered vehicles). How the electricity is generated is a very important issue. We’re currently at about 10-50% of electricity from renewable energy, depending on which country you live in. That’s increasing every day as we’re building renewable energy generation and storing it (thanks partly to the Tesla Powerwall).

        Tesla owners care about the planet – they mostly power their cars from renewable sources. If you live in UK, perhaps you’ve signed up to one of the many renewable energy tariffs – that’ll let you power your car with renewable electricity, as well as your home.

        • Simon

          We shouldn’t confuse an admiration for Tesla and what it purports to do, with the investment case. Tesla admirers are not merely individuals but also institutional investors. However, ther institutional investors have a duty to their clients to get the best returns and minimise risk. The article merely points out that risk for one reason or another is increasing.

          What you do as a hobby is one thing, what professional investors do wih people’s savings and pensions is something entirely different and there is no room for emotional or ideological attachment to one investment, unless perhaps the fund is an ethgical one.

          Whatever your feelings, professional investors are already reacting, the stock has lost a quarter of its value in 4 weeks and the tield on the bonds is telling a similar story. There are no sentimental, hobby or emotional investors in the bond market.

          This was a well written appraisal of Tesla as a stock market participant, setting out some hard truths. The fact is that any of the top 6 car makers could build more EVs than Tesla with little trouble and probably already do so. They also make profits and generate cash. The market may be starting to wake up to the reality that at some point Tesla has to do the same and at that point is has direct comparables that are much cheaper. Shorting Tesla hasn’t been much of a thing hitherto but it may well start to be quite commonplace.

        • JaneMorris

          Ok now im convinced you’re part of the Tesla PR machine.

          Tesla didn’t invent the EV, it invented the luxury performance EV. Nissan has done far more than Tesla to produce an affordable mass market EV. The Leaf was launched in 2010 when all Elon had to offer was a converted Lotus toy. From a practical perspective the latest Leaf is just as good as the Model 3, cheaper and you can actually buy one without being on a 2-year waiting list!

          • Oh come on Jane! The leaf is ugly, slow and has a range of 107 miles. The Model 3 is cool, fast and has a range of 220 miles (or 300+ miles if you choose the bigger battery pack). Well done Nissan for actually trying to build a true electric car – they’re well ahead of the others, most of which still don’t have a single electric model available to purchase right now. Nissan has also managed to sell quite a few Leaf’s and the next version should have a range of 225 miles, so its improving.

            Nissan and Toyota did more than any of the other traditional car manufacturers in switching to electric vehicles but they’re baby steps. What the world needs is a step change and its Tesla who single handedly made electric cars cool.

            Credit where credit is due, if Tesla didn’t exist, we’d still be stuck in internal combustion engine hell.

            Tesla doesn’t have a PR machine, at least, not one that it pays. It has real people like me that are hugely impressed with what it is doing. Talk about David v. Goliath. Climate change is the single biggest issue of our time and we need pioneering new entrants like Tesla, BYD and the other new motor startups to give us a real alternative to the internal combustion engine.

            • JaneMorris

              But remember the Leaf costs from just £20k and buyers dont have to wait years for delivery. The model 3 is effectively unavailable outside of USA and the cheaper variant has not been produced yet at all.

              The Leaf however does have major problems ie its battery cooling design only permits 2-3 rapid charges per journey. And for that reason i won’t be buying.

              I need a car that will cover 400 miles in a day with no BS. A Tesla S or X would do fine provided there are chargers where needed. Or for 13 of the price i can buy a German made executive saloon with a diesel engine.

    • Thomas

      Reading the first sentence I had the doubt you might be serious, but then realize it was satire pretty quick >_>.

  • FourTuna

    I fear a lot of Tesla buyers are just virtue signalling. Their prices are way out of line for most motorists and the company is starting to see real competition from the major motor manufacturers. I suspect they will just become an expensive toy for the world’s wealthy and not have much impact on day-to-day motoring.

    • People are buying Tesla in place of BMW, Mercedes and other high end cars. There’s a huge market globally for such vehicles. Tesla may never compete in the lower end car market (sub £20,000). It can leave that to brands like Ford, Fiat, Peugoet, Toyota. Tesla’s mission is to accelerate the worlds shift to sustainable transport – by demonstrating how electric cars are dramatically better than internal combustion engine cars. Tesla hopes that other car companies will follow its lead and switch to electric, which thankfully is beginning to happen.

      Right now, Tesla has no credible competition in the electric vehicle market. No other car available to buy today comes close to the specification and quality of a Tesla Model S or Model X. Other manufacturers have announced cars that they plan to build in the future but they’re not available now, so we can’t say how good they’ll really be. Plus, those other manufacturers don’t actually want to build electric vehicles – they’re being forced to. If they don’t, their businesses will die. It’s not exactly an ideal way to do business – being forced to do something rather than doing it by choice. Their heart isn’t in it.

      Tesla has all the right motivations. That is inspirational for its staff and a big reason why so many customers have put down deposits to buy one.

      • JaneMorris

        The jaguar i pace is just a few months away and will be a serious competitor to the X, especially in Europe where its slightly smaller bulk is better suited to our narrow cartridgeways.

        So no matter which car you think is better the competition is heating up and that cant be good news for a fledgling like Tesla as its market share become diluted.

  • JaneMorris

    Bad news today for Tesla cult members…another autopilot death.

    I guess this is what happens when a car making rebrands cruse control as ‘autopilot’ – users think the car can really drive itself.

  • Andrew Crow

    I just love the idea that one self driving vehicle crash negates the whole business. How many human drivers got killed this week.? And how many pedestrians did they kill? How many minor collisions were they involved in?

    Quite a lot.

    The biggest losers in the development of autonomous vehicles will be the insurers.

    Parasites looking to protect their host.

    Follow the money. Never fails.

    • Richard Tavener

      Spot on !! Of course, this accident is distressing but as you say, look at the number of fatal RTAs involving conventional vehicles. Many large companies are investing billions in driverless car technology with Alphabet, via its Waymo subsidiary, apparently in the vanguard and they certainly won’t stop now. Rather they’ll probably invest even more to perfect the process.

  • Simon

    So Tesla, down another 5% on Monday, looks like a pit option or short position when this article aired would have been a good move. Blind faith in Tesla or any other company isnt too bright really

    • Richard Tavener

      You’re absolutely right ! As I said in a previous posting, punters don’t seem to care about Tesla’s appalling finances or, perhaps, they’ve never even thought to look at them. If they did and understood them, they would get a nasty shock ! Instead, it seems that, like another poster here, they’re simply obsessed with the actual cars which Musk has produced ( or has planned for the future ) and the whole concept of a greener planet. Great if you’ve got the money to pursue the dream but in Tesla’s case, it most definitely hasn’t and unless some fairy godmother appears from nowhere, this company is going to the wall ; end of !!

  • Thomas

    I am giving Tesla a break.

    Let’s just ignore the whole discussion of whether it’s clean or not, climate change etc.

    Let’s try one simple question.

    Will you defend Musks merger of SC into Tesla inc? I mean he is under shareholder lawsuit right now. (Or so I hear).

    And why are we pretending solar power is even efficient? The one major energy producing renewable (hydropower) doesn’t get any state subsidies at all.

    And finally, you are not telling the truth about the major companies not having EVs long before Tesla. GM, Ford, Toyota, they all had EVs long before the Roadster. Problem was they didn’t sell. For the same reason as they don’t know even with subsidies. Because of issues with range, refuelling, cost etc.