It's All About A Capital Raise For Tesla

Summary

• Tesla lost more than 2 Billion during a 75-minute conference call.
• The media blamed Tesla's loss in share value on Elon Musk's loss in temper.
• In realty, it's investor concern over Tesla's capital requirement.

By K C Ma and Zachary Gunn

Right after 4:00 pm., May 25, Tesla (NASDAQ: NASDAQ:TSLA) released its Q1 2018 earnings report, beating both revenue, EPS, and margin estimates. The stock responded with a 2.2% increase before going into the company conference call. By the end of the call, the stock was down -4.5%.

For an otherwise positive earnings report, the media has attributed Tesla’s 2 billion loss in stock value during the 75-minute conference call to Elon Musk’s loss in temper.

Bloomberg TV even compared Musk’s conference call (Figure 2) to Jeff Skilling's (of Enron) infamous "Meltdown" conference call eight months before its demise (Figure 1). This was during the second quarter of 2001 when Skilling used profanity directed toward an analyst during an earnings call when the stock was at $55 and by the end of the year it was $9. CNBC also spent the first 30 minutes of Squawk Box replaying Musk’s emotional responses to analysts’ questions.

However, it is our contention that the -7% post-ER drop in Tesla stock price is a result of investor worry over Tesla’s cash burn and its imminent need for a capital raise. In Figure 2, it is clear that the major slide in Tesla prices during the conference call started from Point B and Point C on. The following is the actual Q&A transcript at Points B and C:

Point B:

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thanks. Elon, so you repeatedly said I think in recent weeks that you do not need to issue equity capital at Tesla, and I think many investors on this call would say it's better to raise capital when you don't need to. So I guess the first question is...

Elon Reeve Musk - Tesla, Inc.

I disagree.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Yeah, you may not need to, but do you want to?

Elon Reeve Musk - Tesla, Inc.

No. I specifically don't want to.

Point C

Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC

And so where specifically will you be in terms of capital requirements?

Elon Reeve Musk - Tesla, Inc.

Excuse me. Next. Boring bonehead questions are not cool. Next?"

A causal listener can easily misinterpret that the stock price drop was a result of the Elon Musk’s dismissive and condescending attitude. However, if Musk’s attitude were the reason, the stock price should have dropped following the more fiery exchange at Point D. But it didn’t (Figure 2).

Point D:

Elon Reeve Musk - Tesla, Inc.

You should not be focused on short-term things, you should be focused on long-term things. We have no interest in satisfying the desires of day traders. I couldn't care less. Please sell our stock and don't buy it.

Benjamin Joseph Kallo - Robert W. Baird & Co., Inc.

And anything you can do to help in the near term on that, I think is helpful for the stock. (01:11:29) That's it.

Elon Reeve Musk - Tesla, Inc.

I think that if people are concerned about volatility, they should definitely not buy our stock. I'm not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go.

The bottom line is that, if the price drop is simply an emotional response, the stock price should recover soon. However, if the drop is a result of investor concern over Tesla’s capital requirement, the price drop may be permanent until the real question is answered.

The Real Question: 2018 Capital Requirement

Tesla went through more than $1 billion again in the first quarter. The company had $2.67 billion in cash on hand at the end of the first quarter, down from the $3.37 billion at the end of last year. Tesla's negative free cash flow was year $1.127 billion which was worse than estimated cash burn rate of $978. Under this rate and with the most generous assumption that there's no further production delay in Q2 and the weekly production will be between 3,000 and 4,000 cars by Q3, at least $1.1 billion in capital needs to be raised by Q3 and over $1.8 billion for 2018 (Table 3).

This is not the scenario that Elon Musk wanted to acknowledge at the Q1 conference call.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.