Tesla: Dog And Pony Show

Summary

• New report casts doubt over Buffalo factory progress.
• Maxwell acquisition curious to say the least.
• Panasonic cuts forecast due to Tesla's troubles.

Last week, I discussed the curious case of Tesla's (NASDAQ:TSLA) solar business, which has been a complete train wreck since the purchase of SolarCity. The 2016 deal has crippled Tesla's balance sheet and income statement, which I believe has hampered the company's automotive ambitions. Just a few days later, we got another potential look at how things are going at the Buffalo factory, and it seems to be even worse than thought. Today, I'll discuss that news, along with the curious acquisition Tesla apparently made, and the negative update coming from a key business partner.

The Buffalo boondoggle:

The traditional solar business that Tesla acquired more than two years ago is just a small fraction of that size now. While that may be making the company's operating expense line look pretty good currently, it also means Tesla may not be satisfying job requirements at Gigafactory 2 in Buffalo, New York. As I've also pointed out dozens of times in recent years, the solar roof product is another fiasco that's still ongoing.

On Monday, WIVB news posted a scathing article about Tesla's Buffalo plant. The article details stories from former employees who talked about being paid to do nothing as production was almost nonexistent. When a media event was due to come, Tesla built walls to hide unused equipment and blocked off large areas. Employment numbers for the end of 2018 are not yet known, but former employees doubt they are as high as Tesla states. Of course, end of 2018 figures were before the company's January layoff announcement, and roughly 50 Buffalo employees were laid off in that round the article says. As I discussed last week, the lack of major progress for the solar business could potentially mean large fines down the road for missing employment promises.

The curious Monday acquisition:

Before trading started the week, there was an interesting announcement that Tesla was buying Maxwell Technologies (MXWL). Maxwell is focused on energy storage and power delivery solution products, which would seem like a logical business addition for Tesla's energy segment. It will be an all-stock deal, initially about a 55% premium to Friday's close, that values Maxwell at around $220 million currently. Strangely enough, as of Tuesday's market open, Tesla had not produced an 8-K filing to detail this purchase.

Tesla usually doesn't make a lot of major acquisitions, so this one gained a bit of attention. There's a very curious side to it, as Pivotal Research pointed out in this research note. Given Maxwell's ongoing losses and terrible balance sheet, one wonders if this was a bailout to help China's State Development and Investment Corporation ("SDIC"). SDIC had a roughly 20% stake in Maxwell that was extremely underwater, but this deal would allow them to make a small profit. It just so happens that Tesla is about to start building a gigafactory in Shanghai, so some will draw suspicious conclusions as a result.

On the other hand, Maxwell's business isn't exactly one firing on all cylinders. It has been fined a number of times for different violations, including one last year by the SEC for accounting fraud or deficiencies. Maxwell has burned tons of cash in recent years, primarily thanks to significant GAAP losses, and revenues aren't exactly soaring. In fact, they just divested a chunk of their business that was actually quite profitable. Take a look at the slide below from their presentation last month and my red highlight box.

(Source: Maxwell presentation, slide 13, seen here)

Annualizing the results means Maxwell would be around $100 million in GAAP revenues with a loss of roughly $45 million. While that won't make a huge difference for Tesla's overall results, it certainly doesn't help. The deal could be completed as soon as the second quarter of this year, so it will be interesting to see how Tesla's results look afterwards.

Panasonic not looking good:

When Tesla gave its forecast for this year, the numbers provided didn't seem to show growth as strong as many were expecting. The US tax credit is providing a headwind for sales, and Model 3 units are just starting to arrive in Europe and China. However, Tesla hasn't gotten its costs down enough for the vehicle to be the true mass market product originally hoped for. With the plan for 10,000 units a week pushed back yet again, it seems that battery partner Panasonic (OTCPK:PCRFY) is now lowering its guidance.

(Source: Panasonic slide via Twitter, seen here)

Looking further into the numbers, it is detailed that Panasonic has cut its revenue forecast for the auto business by about $660 million since its previous report. Also, Q4 revenue is forecast to be about 193 billion Yen, up just slightly from the Q3 figure of 190 billion. We'll be halfway through Tesla's Q1 2019 period next week, so by then we'll have a little more data in on how the current quarter is starting to look.

Final thoughts:

In the end, the news lately doesn't exactly inspire a lot of confidence in Tesla. Another look at the Buffalo factory shows that the solar business is definitely not showing tremendous progress. The Maxwell acquisition will add more losses to Tesla's income statement, but was it done to appease the Chinese government in some way? Finally, Panasonic is cutting its guidance for its energy business, reflecting Tesla's slower than expected ramp of the Model 3. As Tesla shares continue to trade in the low $300s, the company will likely have no choice but to pay its March notes back fully in cash, leading some to wonder if a capital raise will be needed.

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