Tesla: Elon Musk has the market on his side, but that won’t last if he is not careful

US Outlook: While Tesla’s electric cars have been a huge success, it emerged this week that it is losing more than $4,000 on every car it sells

Click to follow
The Independent Online

A week is a long time in business, just as it is in politics. On a media conference call last Thursday Elon Musk, the chief executive of the battery and car maker Tesla, basically echoed finance chief Deepak Ahuja by saying that he felt the company had enough cash. And then, two days ago, the company announced a sale of $500m (£320m) in stock, following reports earlier in the week that the company was losing more than $4,000 on every car it sold. There is quite a big difference between having enough cash and oh, can you give us another half a billion?

A glance at Tesla’s profit and loss and cash flow told the truth. Despite decent sales of its luxury Model S, the company is burning cash at an unsustainable rate – just under $800m this year alone, not including the $300m operating loss based on vehicle sales. As Tesla rolls out its new Model X SUV, due for public sale within the next few weeks, and completes construction of its Gigafactory in Nevada, capital expenditure will fall – but without raising funds now it might not have had the cash to get there.

In what is still a bullish market for tech-related stocks and one that maintains great belief in Mr Musk’s aura, it’s likely that Tesla won’t have too much trouble raising the money. Mr Musk himself is putting his hand in his pocket and buying $20m of stock, even if that’s small beer compared with his total holding, currently worth almost $7bn.

However, investors will be uneasy. Nothing works out exactly how we imagine it will, and that applies in the business world as much as in any other. One small delay in production, one technical fault discovered, and the begging bowl will be out again. Tesla should have raised more money now, when many investors are still willing to buy the future growth story at almost any price.

Tesla might have fared better if it were still privately held, not publicly traded, complete with pesky investors who actually want to know what is going on – even if there is no denying the excitement that being a Tesla investor brings to the otherwise mundane world of portfolio management.

To complicate matters further, Wall Street analysts are more deeply divided over Tesla’s outlook than ever before. Investment analysis on Tesla is all over the place. Pick a price target anywhere between $100 and $300 and there is probably an analyst on Wall Street that concurs.

And yet it’s very hard to dismiss the Tesla story outright, as some have done. In my home state of Kentucky, best known for its floundering but powerful coal industry, Teslas are an increasingly common sight. So common that my son no longer gets excited when he sees one. Selling half a million cars by 2020, the company’s stated goal, might not happen so fast but in American cities it is easy to believe that it will happen one day.

So Tesla should sell the new stock without many problems, and will probably also sell the $75m surplus allocated without any bother either. Elon Musk will be quickly forgiven if Tesla manages to deliver on even a part of its promise, although he will need to be more careful the next time he is asked about cash levels. The markets will not be so forgiving the next time around.

Alibaba’s buyback smells like panic

If officials allowing some devaluing of the yuan wasn’t proof enough that China’s economy is in bad shape, Alibaba’s results last week should seal the deal. China’s economy might not be as bad as Greece’s but in terms of global influence it’s a superheavyweight compared with a flyweight, so a much greater cause for concern.

Alibaba is something of a bellwether stock for China’s economy, whether it deserves that tag or not.  It’s a pioneer too: so far the only Chinese tech group to make a real splash outside its own borders, floated with great fanfare in New York, taking on Amazon’s might and, to a certain extent, beating it. That was in the past. Its immediate future looks far less rosy.

Alibaba seemed set for more stellar growth when it came to the market last October in the world’s largest IPO, but it stumbled badly last week by reporting weaker-than-expected revenue growth. That growth of 28 per cent is now deemed to be a stumble shows how crazy this market is, but it is growth relative to Alibaba’s forecasts that counts, and in that regard it was some way short of the mark.

Founder and chief executive Jack Ma found himself $1bn poorer as a result, although his net worth remains something like $30bn. He’ll get by. Alibaba itself, though, is struggling on a number of fronts, including the transition from desktop to mobile commerce and living up to its own sky-high forecasts. The net result is a stock price that has underperformed the Nasdaq by 30 per cent since October’s IPO.

All of which leaves Alibaba in a bit of a pickle. What to do? Buy back stock, of course! Mr Ma, naturally, said he was only concerned with the long-term growth of the stock – hard to believe given that in virtually the same breath he confirmed that the company would spend $4bn over the next two years buying its stock back.

No company that is so early in its growth phase has any business buying its own stock back. Alibaba made more than $20bn in its IPO and should be using every penny of that, and its retained profits, to invest in technology, market share and customers. Buying its own stock back just months after selling it smells of panic.

It’s not alone, of course. Far from it. According to the research group Birinyi Associates, US companies are on target to buy back about $1.1 trillion of stock this year, a record amount by a significant margin. What a waste of money. Mr Ma might regret buying back shares that could be much cheaper before too long.

Comments