by Liam Denning, Bloomberg Opinion
While this week’s episode of Tesla Inc. has left us with several cliffhangers, it did show one thing: just how far the company has veered from Elon Musk’s secret “Master Plan” of 2006.
Musk summarized it at the top of an updated version – “Part Deux” – published in 2016:
1 Create a low volume car, which would necessarily be expensive
2 Use that money to develop a medium volume car at a lower price
3 Use that money to create an affordable, high volume car
4 Provide solar power. No kidding, this has literally been on our website for 10 years.
I’ll get back to point four later. The first three form a pretty standard strategy: Sell a new, highly-priced thing to first-adopters; plow the revenue into building and selling cheaper versions until you’ve built a mass market. It was never going to be enough to build a mass-market car company, though: Tesla Inc.’s total revenue from 2007 through 2010 was less than $250 million. So in 2010, Tesla went public:
We may use a portion of the net proceeds from this offering to fund planned capital expenditures, working capital and other general corporate purposes … A public market for our common stock will facilitate future access to public equity markets and enhance our ability to use our common stock as a means of attracting and retaining key employees and as consideration for acquisitions.
A pedant might argue the Master Plan didn’t mention anything about needing an IPO. Fair enough. But if selling car A enables you to raise capital to help with cars B and C, then I think that still complies with the plan’s spirit.
And the best kind of capital when your ambitions (and costs) are as expansive as Tesla’s is that so-called “patient capital” found in the public market. In Tesla’s case, it’s been very patient:
Despite negative cash flow and steady dilution, investors have not only stuck with Tesla’s stock, they’ve bid it up almost 2,000 percent since the IPO. And that’s possibly where the Master Plan began to go awry.
Although Tesla’s stock has traded for about eight years, roughly half of that enormous gain came in a rough span of just 12 months, from early 2013 to early 2014, coinciding with the early success of the Model S.
That first full year of the Model S in 2013 was also the only one for which Tesla reported positive cash from operations. Rather than plowing it into a cheaper car, though, Tesla took off in another direction. The Model X crossover actually cost more than the Model S. Meanwhile, Tesla unveiled plans for a $5 billion Gigafactory in Nevada. At that point, the company had $846 million in the bank and was heading for its first year of burning through more than $1 billion in cash. It bridged the gap in part by issuing $2.3 billion of convertible debt.
Any company watching its market cap jump from about $5 billion to $25 billion in the space of a year might be tempted to take the opportunity to expand its plans a bit. But spiking stock prices also tend to create a dynamic of their own. In the absence of profits, Tesla’s stock was – and still is – essentially an option on Musk’s vision (that, incidentally, is the underlying reason for the stock’s “wild swings” decried by Tesla this week). And faith in a vision requires a consistent and expansive narrative.
Tesla’s ambitions and accompanying deficits metastasized from there. In 2016, Musk published his updated plan, which read more like a manifesto, heavy on new technologies and businesses “accelerating the advent of sustainable energy” but light on how it would all be paid for.
It also just happened to coincide with Tesla’s decision to buy struggling sister company SolarCity Corp. Remember point four in the original plan?
Provide solar power. No kidding, this has literally been on our website for 10 years.
The somewhat defensive tone fit the context. The SolarCity deal dimmed Musk’s aura briefly, with Tesla taking on the debts of a flailing company part-owned by him, run by his cousin and owing money to both (and Space X). The updated plan, with its reminder of Tesla’s renewable-energy goals, along with sections on the Model 3 car and even robo-taxis, was a useful reminder of the vision thing.
The deal ultimately went through. Attention had shifted already to the Model 3, the mass-market car unveiled earlier that year. As excitement built, Tesla’s stock doubled again in the first half of 2017, effectively providing the rest of that 2,000 percent gain since the IPO.
And yet it’s the Model 3, which should have put the Master Plan back on track, that ultimately brought us to this week’s debacle.
Tesla’s struggle to build the Model 3 and admission that one of its visions – a fully automated factory – didn’t work has tested belief in the company like nothing else. A brief plunge in the stock this spring provided an ugly glimpse of what could happen if the faithful departed. Little wonder Tesla has spent much of 2018 setting short-term targets on production that look like a good way to keep fans happy but less suited to the steady rhythms of churning out cars. Meanwhile, Musk has become more combative with skeptics, including analysts asking sensible questions about operations and finance.
We’re a long way from the simple life of car A funding car B. The stock price now appears to drive strategy and operations, rather than the other way around.
And hence, it seems even the patient capital may no longer be patient enough for Tesla’s purposes. We are still in the dark as to exactly what kind of funding Musk claims to have “secured” for his proposed buyout. Even the board seems a bit foggy on that one, and the SEC has reportedly taken an interest. Moreover, it is still a mystery why any of this is necessary if, as Tesla claimed on August 1, profits and positive cash flow are imminent.
But assuming there is a there there, it would almost certainly have to involve hefty equity checks from the likes of a Softbank Group Corp., sovereign wealth fund or some other vast, proprietary pool. This is the kind of capital that just might be willing to really look past the cash burn, weak balance sheet and inevitable setbacks in an undertaking of this magnitude and effectively recapitalize the vision.
What to call such funding? Tolerant capital? Stoic capital? For it to pay a 20 percent premium and continue to give Musk free rein, it would have to be positively indulgent capital.