Tesla's Financial Crisis Was First A Leadership Crisis

Posted by Vident Financial on 7/31/18 12:21 PM

Tesla has had a tough time of things for the last year. I wrote at some length last year about the warning signs of a leadership crisis.

The issues were ego-centered culture, financial statements which seemed a little too good to be true, and treating shareholders as second class citizens. And, of course, there was the fact that the stock was extremely expensive at the same time that the company was not making any profit at all. At the time of that writing, the company had already hit a few speed bumps, but to Wall Street it still seemed to have that new car smell.

Then problems became more difficult to ignore. Lawsuits from shareholders; broken production schedule promises; blaming subordinates (who warned Musk that production deadlines were unrealistic); traffic fatalities from allegedly safe self-driving cars; product recalls.

There were a series of prominent crashes of Tesla cars back in March-May 2018 that raised doubts as to whether Tesla cars were safe.

“In March, a Tesla driver was killed while test-driving an autopiloted Model X, the impact decimating half the car. Then in May, the NTSB announced an investigation after two teenagers were killed in a Tesla Model S after its battery caught fire following a crash. A similar accident claimed a driver two months prior, with California firefighters reporting that the Tesla battery kept reigniting days after the smash.”

(Source.)

All discussed here.

Then there was the issue of pinging and clanking coming from the financial statements, which I detailed here.

Then there was the issue I wrote about in May. The company didn't have the valuation margin to withstand problems. Drive your company too fast, and you can't survive the crash. At some speeds, even financial potholes can be devastating.

Then there's the ways in which Tesla keeps its minority shareholders locked in the trunk. They were willing to put up with that for a while, but not when Tesla racked up its biggest single losses ever.

I wrote those in May.

The chart below tells the sad story of that period and even afterwards.

Tesla vs DOW

(1 month. Tesla in blue; DOW in red. Article courtesy of TradingView.)

Things have deteriorated further since my writings in May. The following are just the highlights:

In response to the poor financial performance in the beginning of the year, Musk hosted a bizarre conference call in which he insulted analysts of the company, and wrongly attributed all criticism of the losses to 'short-sellers'.  Musk ignored a question he didn’t like during a conference call, saying “’Next. Boring boneheaded questions are not cool." (Source.)

Musk’s attempt to build a submarine for the Thai cave rescue was generally seen as a publicity stunt. When he was criticized by one of the divers, Elon Musk called him a “pedo” on Twitter. Musk apologized after being urged to do so by in a public letter written by Tesla shareholders.

“In response, Musk launched a scathing attack on the cave explorer on Twitter[…] He then made the baseless claim that Unsworth was a pedophile, saying: ‘Sorry pedo guy, you really did ask for it.’”

(Source.) 

Most recently, just earlier this month, a memo was leaked in which Tesla asked suppliers for refunds on payments made by Tesla so that the company can become profitable.

“Tesla Inc.  has asked some suppliers to refund a portion of what the electric-car company has spent previously, an appeal that reflects the auto maker’s urgency to sustain operations during a critical production period.”

(Source.)

This came after a long period of time in which Musk had been denying the serious cash-flow problems which the company faced.

There's much to admire in Mr. Musk: Entrepreneurial vigor, respect for the engineering, and he certainly is entertaining to watch. But the accumulating financial losses and plummeting stock prices have been anything but fun to watch, at least for shareholders. Which is why I'm glad that the indices that I had a hand in creating and managing (FLAGLSX and VCUSX) hold no weighting in Tesla at all. Starting with principles helps one to see who is most vulnerable. We can't always predict the weather, but we do know which cars (and companies) are most likely to hydroplane and then crash when the rains come.

Topics: US Equities, Principles-Based Investing

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