Hidden Forces Collapsing Demand at Tesla amid Elon Musk SEC Fraud Charges | Gordon Johnson
In Episode 61 of Hidden Forces, Demetri Kofinas speaks with equity research analyst Gordon Johnson, about a possible bankruptcy of Tesla amid the recently announced SEC fraud charges levied against its CEO Elon Musk. The two also discuss the ongoing criminal probe of its CEO Elon Musk, by the Department of Justice, and the impact that it may have on the company's stock price.
Gordon Johnson has been called the biggest bear on Tesla by Bloomberg and CNBC and has the lowest price target on the street for the electric car manufacturer. He’s also been recognized for his accurate stock picks in numerous publications including Bloomberg, Barron’s, Forbes, The Wall Street Journal, Reuters, The Financial Times, and TheStreet.com.
Tesla and Elon Musk were the subject of back-to-back episodes we did with Charley Grant and Mark Spiegel in the first two weeks of April 2018. At that time, we knew that the company had ended 2017 with $3.4 billion in cash and equivalents while having raised an additional $550 million from bonds backed by lease payments in February of this year. Tesla was also losing $28,000 on each car sold with long-term debt and battery purchase obligations standing at $31.4 billion and run-rate interest expense of nearly $600 million per year with a debt-to-equity ratio of 243% as of December 30th, 2017.
Tesla has since released its second-quarter results, posting losses of $17,600 per car delivered. These numbers are expected to improve in the third quarter due to much higher sales volumes of the Model 3 along with sales of ZEV credits that the company stored but did not use in Q2. The run-rate interest expenses for Tesla stand at $654 million-per-year. The company has reported $2.236 billion in cash of which $942 million is in the form of customer deposits.
In our conversation with Gordon Johnson, we begin with a discussion of the ongoing drama at Tesla, including a recent timeline of the most critical events surrounding the company:
On August 1st, Tesla reports the largest quarterly loss in its history showing a GAAP loss of $717 million and free cash flow of negative $812 million. But shares rise on Musk’s claims of positive cash flow and profit in the second half of 2018, and signs of more consistent Model 3 production. In this Q2 release, Tesla claimed that it would be GAAP profitable in Q3 & Q4 baring a “force majeure.” I’ve asked Mark Spiegel for his take on this and his response is: “I’ve run numbers every which way I can and the best I can come up with for Q3 is a GAAP loss of around $100 million.”
On August 7th, Elon Musk tweets that he is “considering taking Tesla private at $420 a share,” and then follows up by saying “funding secured.”
On August 12th, Azealia Banks shares an Instagram story about how her experience at Elon Musk’s house resembled the movie “Get Out,” suggesting that Elon was possibly on drugs during the August 7 tweetstorm.
On August 13th, Elon Musk follows up on his “funding secured” comments with a press release that attempts to provide context for the August 7 tweet.
On August 15th, Charlie Gasparino reports that the SEC has started a probe into violations made by Elon Musk.
On August 15th, ex-Tesla employee and whistleblower Martin Tripp tweets photos that he alleges came from inside the company showing battery scrap, trailers containing battery waste, and documentation of punctured battery parts in Model 3 vehicles. Tesla denies that any punctured battery parts made it into vehicles.
On August 16th, a Tesla ex-security employee files a whistleblower complaint with the SEC, accusing the electric vehicle maker of spying on employees, hiding significant theft of raw materials, and alleging drug dealing at the company.
On August 16th, Elon conducts a tearful interview with the New York Times.
On August 20th, (or thereabouts) reports emerged that Lucid Motors (a silicon valley electric car startup) is in talks with Saudi Arabia’s sovereign wealth fund for a reported $1 billion in funding.
On August 24th, Elon Musk released a public statement about his decision to keep Tesla public.
On September 6th, Elon Musk does “the Joe Rogan Experience,” smoking marijuana during the show.
On September 7th, Tesla’s chief accounting officer Dave Morton resigns after a month on the job. In a statement from Tesla’s recent 8K filing, Morton says he left Tesla because of “the level of public attention placed on the company.” Dave replaced the previous CAO, who left in March, on apparently no notice.
On September 7th, Tesla’s Chief People Officer Gaby Toledano announces she is leaving the company after announcing a leave of absence in August. She was at the company for only a year, beginning in May of 2017.
On September 8th, it is reported that Justin McAnear, vice president of worldwide finance and operation, is parting ways with Tesla. McAnear has confirmed that his last day at Tesla will be Oct. 7 according to a statement obtained by CNBC.
On September 17th, British diver and cave explorer Vernon Unsworth sues Elon Musk for libel in a California district court. The lawsuit comes two months after Musk calls Unsworth a “pedo guy” on Twitter, following an interview in which the Brit denigrated Musk’s attempt to build a mini-submarine that could rescue a group of Thai boys trapped in a cave. Though Musk later deleted and apologized for the tweet, he doubled down on his accusations of pedophilia a month later.
On September 17th, it is reported that Lucid Motors closed a $1 billion deal with Saudi Arabia to fund electric car production.
On September 17th, reports emerge that the justice department has opened a criminal probe into Tesla over public statements made by Elon Musk.
Despite the non-stop bad news emanating from the company, Tesla's stock price has been largely unaffected. Gordon Johnson believes that this resilience in Tesla’s stock may be coming to an end. Not only does he believe that Tesla is facing major quality control issues, but it is also his contention that demand for the electric car may already be collapsing. Add to this criminal charges that may be pending against Elon Musk, and one can begin to see a path towards bankruptcy emerging at Tesla.
As always, this episode of Hidden Forces is for informational purposes only and should not be relied upon as the basis for financial decisions. All views expressed by Demetri Kofinas and podcast guests are solely their own opinions and should not be construed as financial advice.
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod