Pando

Tesla shareholders are waging a culture war of their own

By Kevin Kelleher , written on May 4, 2018

From The Earnings Desk

If the stock market has a correlate of the culture wars that have divided political discourse into two irreconcilable camps, it's Tesla.

Moreso than Netflix, or Apple, or Amazon – stocks that have inspired bulls and bears to shout at each other for years – the void separating Tesla's supporters from its detractors is especially wide and deep. In the case of those other three companies, the market has tended to favor the bulls. The jury is still out on Tesla, which makes the debate especially loud.

The more uncertain Tesla's outlook becomes, the more the pro-Tesla and anti-Tesla camps dig in. Every announcement, every bit of company news, every financial bon-bon tossed out to investors – each one allows both sides evidence that Tesla is going to rule transportation. Or that Tesla is going to go down the drain soon.

The latest example of this dynamic came this week when Musk broke with the protocol that executives are supposed to follow in earnings calls. Having listened to a lot of these calls, I understand the protocol – analysts ask two or three questions when they are alloted one, executives deflect said questions with prepared talking points – and yet I understand when someone on either side bridles against it.

Musk bridled. Most coverage of the earnings call described his performance as “bizarre.” Detractors called it a meltdown. One analyst said it was the most unusual call in his 20-year career. It was unorthodox, and it was even disrespectful to analysts who were simply asking questions reasonable to Tesla shareholders. But it was also just Musk being Musk.

Musk sounded like a CEO who had had enough of questions digging at vulnerabilities that could, if managed poorly, undo his company. Those questions were exactly the ones analysts should have been asking. Before the earnings report, Musk had tweeted his okay to a Tesla shareholder hoping to ask him questions on behalf of retail investors. Instead he gave that shareholder, Gali Russell, 20 minutes to chat with Musk about future Tesla ambitions.

“We're going to go to YouTube,” Musk said batting away a question about Model 3 reservations. “Sorry. These questions are so dry. They're killing me.” Earlier, after an analyst asked about capital expenditures, Musk chided him: “Boring bonehead questions are not cool.”

If there was an early warning sign of this behavior, it came right at the start of the conference call discussing earnings. Martin Viecha, head of Tesla's investor relations, made the usual introductory remarks before handing the call over to Musk, saying, “Elon has some opening remarks... Elon?” “I think our letter says most of it,” Musk said, in that mumble-that-somehow-imparts-more-information-than-you-could-possibly-comprehend.

Opening remarks that punt to the shareholder letter. That tells us what Musk thinks of these calls. Tesla's ambitions are for large-scale change that takes years to accomplish. Questions of what's happening this quarter are like buzzing gadflies to Musk. When analysts were allowed to ask questions again, they were nearly pleading for information. “Is there a way that you can update us?” one asked, looking for Model 3 production updates. “I mean you're active on Twitter. Can you just let us know?” That somehow led to this commentary.

Really the point is, like, people get too focused on, like, what's happening in the space of a few weeks or a few months. This is an old maxim of investing. 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...

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.<

Musk was right about the volatility. Tesla's stock, which had initially popped on what seemed like a reassuring financial report, lost as much as 9% of its value during a slow, steady descent that began only after Musk became snippy. It's since recovered some, but given the very volatility that Musk was referring to, the market reaction to his comments will look like a blip as bulls and bears war over the stock.

This morning, Musk addressed the indicent on Twitter. Without explicitly apologizing, he said “it was foolish” to not answer analyst questions. “It's important to know that Tesla is the most shorted (meaning most bet against) stock on the market & has been for a while,” Musk tweeted. “The 2 questioners I ignored on the Q1 call are sell-side analysts who represent a short seller thesis, not investors.”

The number of shares held by short sellers has risen to 38 million in mid-April from 28 million in March. This morning, Musk also predicted on Twitter those short sellers would soon be sorry: “short burn of the century comin soon.” This kind of culture wars rhetoric is only inflaming the debate around Tesla. If you're a bull, Tesla is destined for success, and Musk's antics are warranted. If you're a bear, Tesla is a ticking time bomb, and Musk is starting to lose it. 

The past few months have been filled with Tesla news that somehow managed to justify the arguments of bulls and bears alike. Production of the Model 3 has been mired in delays, but Musk is pushing to deliver 5,000 a week with the production problems resolved. Moody's downgraded Tesla's credit rating, citing the rate at which the company was burning through cash. Tesla's free cash flow has been negative, burning through a billion dollars for three of the past four quarters.

The company has burned through $3.9 billion in the year through March, leaving it with about $2.7 billion in cash on hand. Tesla is planning to build a factory in China as well as a second factory, to help new products like a semi truck and the upcoming Model Y. At the rate it's using cash, Tesla may need to raise more capital later this year. But without shipping more Model 3's, that could prove tough.

Hence the questions about touchy topics like capex and Model 3 production. Tesla is approaching a crossroads. Either it is going to finance from its own operations the company's ambitious and costly plans for new initiatives, or its going to run dry of capital as investors and creditors get worried. Short sellers are convinced its the latter. Musk and his fans believe he'll prevail.

When such debates escalate into a war of words, the victory is rarely won through caustic rhetoric. Musk's performance on the earnings call has already become a punchline on other investor calls. One analyst said it reminded him of an Enron call before that company's downfall. In the long term, this will all be forgotten if Tesla succeeds. But in the short-term that Musk disregards, the narrative around Tesla is losing some of its magical sheen.