Elon Musk’s behavior during Tesla’s analyst conference call last week was extraordinary, by almost any measure. Why would he invalidate a question from Sanford Bernstein analyst Antonio Sacconaghi by calling it “bonehead” and “not cool,” then dismissing it with a cursory “Next?”
The underlying reason for Musk’s behavior, I suggest, stems from recent short selling of Tesla’s stock, investors’ growing impatience with delays in the production schedule of the much anticipated Tesla 3, and Tesla’s large and growing need for capital.
None of these issues should come as a surprise. A year ago, and then again in July 2017, I wrote about Tesla’s stock being overvalued, Musk’s persistent tendency to provide overly rosy forecasts, and the overestimation by some sell side analysts of Tesla’s free cash flows. I will not repeat what I wrote then, as readers are free to go back and see for themselves. Instead, I want to offer some behavioral insights about Tesla in light of last week’s events.
Consider the catalyst for Musk’s tantrum. It was a two part question by Sacconaghi. First, Sacconaghi asked about the guidance Tesla was providing about lower capital expenditures this year: he wanted to know what Tesla was reducing. Musk left this question for his CFO, Deepak Ahuja, to answer, and Ahuja made a general statement about simply being smarter about CapEx, in respect to both the Model 3 and the company’s infrastructure.
Second, Sacconaghi asked for a comment about Tesla’s capital requirements, what finance textbooks call external financing required. Musk, not Ahuja, fielded this question and simply blew up in the way I described above.
Without question, Sacconaghi’s questions had merit. According to data compiled by Bloomberg, Tesla had spent approximately $3.9 billion in the previous 12 months, has large future expenditures on the horizon, and has cash holdings at the end of March that were about $2.7 billion. Finance textbooks speak about the challenge of managing growth when there is a spurt in sales in excess of how much cash the company can generate internally. Tesla is now facing a classic textbook problem to manage its growth.
The Wall Street Journal describes how Musk took to Twitter to defend his remarks, saying that the answer to Sacconaghi’s question about capital requirements could be found in a previous letter he had sent to shareholders. However, he also tweeted that the analysts whose questions he dismissed were from firms who were shorting Tesla’s stock.
Musk’s warning to the short sellers of Tesla’s stock is that they will soon be burned, as “flamethrowers” arrive.
Markets are tough to predict. Who knows, Musk’s prediction might be right. Or it might be wrong. No matter what, here is what we can say.
Tesla’s management team does not know whether Tesla’s stock is fundamentally overvalued because, according to CFO Ahuja, they do not compute intrinsic value. In this respect, Tesla’s management is similar to many Silicon Valley firms during the early development phase, where the finance team focuses primarily on sources and uses of funds. Speaking in March, at a chapter meeting of FEI, Ahuja emphasized that his focus is to embed finance into the company’s operations, to increase efficiency, as the company seeks to grow by 80% a year, disrupting both the automobile industry and the energy industry. He made clear that revenue growth, not profitability, is the current priority.
Tesla is a good company, with the admirable mission of combating global warming by changing human habits about transportation and energy consumption. The trouble is that Tesla’s stock is not a good stock, when evaluated in strictly financial terms. It is fine for investors to hold the stock if doing so enables them to express their personal values. It is just that it would be better if they did so with their eyes wide open about the stock’s intrinsic financial value.
Hersh Shefrin, Professor of Behavioral Finance, Santa Clara University and author of Beyond Greed & Fear, Behavioral Corporate Finance, and Behavioral Risk Management.