In this week’s episode of Hidden Forces, Demetri Kofinas speaks with Charley Grant, a columnist for the Wall Street Journal who has been writing critically about Tesla since 2015.
Tesla sits at the intersection of a number of powerful forces that we have covered on this program: the ready availability of cheap financing, the growing wealth and income gap, and the preponderance of technology in the popular culture. The first of these forces has already been showing signs of abating. Interest rates have been rising steadily for the past two years, putting a strain on companies like Tesla, which have relied heavily on credit markets to support their cash-intensive businesses. In fact, according to Stanphyl Capital’s Mark Spiegel, “Tesla’s interest expense is now at a run-rate of nearly $600 million a year, which in Q4 amounted to $4,884 per car sold.” This means that fully one-third of the company’s gross profit goes towards servicing its debt. But, the willingness of debtors to continue to fund these losses looks increasingly doubtful, leaving equity markets as the next best source from which Tesla is likely to raise capital. The company’s stock price has dropped more than twenty-five percent in the last thirty days, so it is unclear how many new shares Tesla can afford to issue without turning a limp into a fatal injury. Time, in other words, is not on Elon’s side.
As if Tesla’s financial woes were not enough, the broader equity markets may be in the processes of peaking or else may have already peaked, adding additional roadblocks to the electric car maker’s ability to raise capital. There are also signs that Silicon Valley’s honeymoon period with investors and the broader public may be over. This is something we covered in an episode on Uber with transportation analyst Hubert Horan this past summer. If this is true, and the public’s patience with Silicon Valley is wearing thin, then Elon Musk may find it harder to distract investors from failing fundamentals with the promise of yet another fantastical new product (e.g. hyper loops, electric semi-trucks, and an all-electric passenger airliner).
At this stage, the single most important question any investor in Tesla must be able to answer is, “what is the path towards profitability?” Charley Grant thinks there is no longer a path towards profitability for Tesla. “I don’t believe they have one,” he says. He believes Tesla may be on the inexorable road towards bankruptcy instead. What do you think?
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou