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Elon Musk and Tesla Bulls Are So Over This Covid-19 Panic

Liam Denning

(Bloomberg Opinion) -- Tesla’s earnings — as in the numbers, rather than the show — are essentially meaningless.

Case in point: $16 million. That’s Tesla Inc.’s GAAP net income for the first quarter. It was a surprise relative to the consensus estimate. Two things, though: First, that consensus has been dropping like a stone. Second, the earnings are vastly more than explained by a surge in Tesla’s sales of greenhouse-gas emission credits to $354 million, more than double the average for last year(1). Those credits also boosted Tesla’s reported gross margin on automotive sales to 25.5% from an underlying 20%, a number that itself lacks details until we get the 10Q filing.

Yet, on the back of this, Tesla’s market cap rose by another $21 billion in aftermarket trading. Indeed, since another surprise profit in October kicked off a surge in Tesla’s market cap, it has risen by more than $115 billion. Sum total of earnings reported in that time: $264 million. Credits sold: $621 million. I would say “you do the math,” but let’s face it, who does?

For many companies, this earnings season is simultaneously dreadful and, because of Covid-19, excusable. Yet it’s worth remembering the worst of it hit the U.S. in April. Tesla didn’t even suspend operations at its main plant in Fremont, California, until the last week of the month (and even then, only after some back-and-forth with local officials). Tesla’s announcement Wednesday evening should be read in this context.

Liquidity is all in the middle of this pandemic, and Tesla noted up top its cash balance increased by $1.8 billion to more than $8 billion. Recall, however, Tesla raised $2.3 billion by selling new shares in February. Actual free cash flow for the quarter, as in cash from operations less capital expenditure, was negative $895 million. In other words, Tesla burned through almost 40% of the cash it raised.

Similar to last year, Tesla also kicked off 2020 by under-spending relative to capex guidance provided two months ago. Had it met even the low end of that range, then cash burn would have been closer to $1.1 billion. A counter-argument might be Covid-19 had already begun to affect spending decisions last quarter. But Tesla noted Wednesday it continues to invest “significantly” in its products and aims to grow capacity quickly.

Another counter-argument is that Tesla suffered a build-up in inventory of almost $1 billion. This makes more sense given disruption was spreading across the world in March. However, it also points to the pressures building this quarter.

If Covid-19 suddenly went away and activity returned to normal, then that inventory pile-up would unwind quickly. But that is unlikely to happen. While Tesla’s new factory in Shanghai is getting up to speed, lock-downs mean it will likely be several more weeks at least before the more important U.S. plants are back up and running.

I don’t think it’s an accident that CEO Elon Musk, who in early March dismissed the coronavirus panic as “dumb,” took to Twitter again on Tuesday evening to demand that (Someone? The cosmos? Bots?) “FREE AMERICA NOW.” On Wednesday’s call, he characterized the lock-downs as — limber up your eyeballs for a good old roll now — “fascist.” 

Meanwhile, the backdrop remains a deep recession hitting vehicle sales worldwide. Tesla held off revising full-year vehicle sales guidance. But since it implies a jump of more than one-third, year over year, through the rest of 2020, it can safely be ignored. The company’s statement about managing costs and working capital carefully is more relevant.

The combination of the past quarter’s cash burn, this quarter’s likely worse cash burn, and the murky outlook means the odds we could see another equity raise this year are rising. All the familiar narrative elements — China, Model Y, new factories, self-driving and even the elusive Semi truck — were on display Wednesday.

And, given the stock price, investors appear ready for it. Dilution seems of no concern. Indeed, even if the stock stayed flat at Wednesday’s close, then Musk would be in line to get the first tranche, worth 1% of shares outstanding, of his gigantic stock-award program set up in 2018. This is dependent on Tesla hitting various metrics, including averaging at least $100 billion of market cap over 30 days and six months.

If someone was paying $900 for Tesla’s stock in February and, despite everything in between, almost $900 on Wednesday evening, then they aren’t just looking beyond Covid-19. Their time horizon may stretch beyond whenever the next pandemic turns up. Who needs earnings?

(1) See this for an explanationofthese.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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