**Dear Reader, I hope you enjoy this article. - Vitaliy**
Watercolor is by my father, Naum Katsenelson
Questions I'd be Asking If I Owned Tesla Stock
**Here's a big question I'd be asking if I owned Tesla stock: What
happened to 345,000 reservations?**
When Tesla's Model 3 was released, it was supposed to be a $35,000
car. Four hundred thousand people, including yours truly, put down a
$1,000 deposit to reserve their spots in line so they could get their
hands on that marvel as soon as it became available. It was a brilliant
move by Tesla, as it provided the company $400 million of interest-free
financing - the biggest crowdfunding project ever.
Today, after some delays, the Model 3 is being produced. However,
$35,000 seems to have been a fiction of CEO Elon Musk's imagination.
Though the car is getting great reviews from auto critics, the price for
a bare-bones Model 3 starts at $49,000, and the tax incentives are
fading away.
But something interesting happened recently. I received an email from
Tesla that said: Model 3 is available to order, and no reservation is
required in the U.S. We're now offering all our best options -
including our Long Range and Performance configurations with dual motor
all-wheel drive. You can design and order yours today for delivery in
approximately 2-4 months.
On the surface this sounds like great news, except that it begs a
question: What happened to 345,000 orders? Let me explain. According to
Bloomberg, which has been tracking Tesla's production, to date (as of
July 28, 2018) Tesla has produced 55,000 Model 3 cars. Since a $1,000
deposit was supposed to secure buyers a place in line, any car ordered
today will only be delivered after orders that were placed years ago are
fulfilled - after all, 400,000 people paid Tesla $1,000 to hold their
places.
Thus there are only three possible explanations for the email I
received. One is that Model 3 production is expected to accelerate at an
exponential rate to 40,000 cars a week, starting now. However, Bloomberg
estimates that Tesla's normal production cadence of the Model 3 is
closer to 2,825 cars a week, so this is a highly unlikely scenario.
Or two, maybe Tesla has been extremely liberal with its statement of a
two-to-four month delivery schedule because it still has 345,000 cars to
produce before it can start fulfilling new orders, and the company is
using that email to raise additional funds from new customers making
deposits. (The required deposit is now $2,500.)
There is a third explanation: The bulk of the original 400,000 orders
were for a $35,000 car. When it came time to actually buy the car,
consumers may have realized that the out-of-pocket expense was much more
than expected and simply canceled
their orders, draining Tesla's balance sheet of $345 million.
**This brings us to the next question: How sound is Tesla's balance
sheet?**
What Musk has achieved with Tesla and SpaceX is truly astounding. I have
incredible respect for him, but he is also a magician playing a
confidence game. If Musk can continue to convince the market that Tesla
has a bright future, then the market will continue to finance Tesla's
losses, and maybe Musk will figure out how to produce the Model 3 more
cheaply and then Tesla will sell hundreds of thousands of Model 3s and
the future will be as bright as Musk paints it.
For that to happen, Tesla needs to maintain its high stock price, and
investors have to believe that Musk is the Iron Man. Investors have to
suspend belief, ignore current problems, and focus on the future.
However, if the market loses confidence in Tesla and Musk, Tesla is
done. This company is losing billions of dollars a year; it has an
over-levered balance sheet. This is where Musk's confidence game comes
in.
If you believe in magic stop reading right now. Okay, you've been
warned.
There is no magic. Magic is just the art of misdirection. The magician
gets you to focus on the shiny object he holds in his left hand and you
don't see what he is doing with his right hand.
Musk has been showing us a lot of shiny objects. Some are real, like the
success of SpaceX; some are superfluous, like sending a Tesla Roadster
into space, and some are future promises on which Musk may or may not be
able to deliver, like his futuristic underground railroad for cars (the
hyperloop) and the Tesla truck, which is unlikely to be produced on time
and at the promised price. The list is long in this category and
never-ending; Musk's futuristic thinking knows no bounds.
But importantly, these promises are the shiny objects that keep
Tesla's stock price high.
If I was a Tesla investor I'd be seriously worried about the
company's balance sheet. There are some ominous signs that Tesla's
financial situation is deteriorating rapidly. Tesla reportedly recently
sent an email to its suppliers asking them to give some money back to
help the company with its profitability.
Such requests are made by companies looking for Hail Mary solutions to
significant financial problems. If suppliers start questioning Tesla's
financial viability, they'll start shortening their accounts
receivables periods and start requesting letters of credit. This would
escalate the company's problems. Hail Marys are acts of desperation.
Putting this in the context of the likely Model 3 cancellations, -
Tesla's cash burn has likely gotten a lot worse.
**This brings us to the last question: How effective is Musk at running
Tesla?**
Tesla is Elon Musk. He has achieved more than many of us will achieve in
a thousand lifetimes. But today Musk is running half a dozen companies
(Tesla, SpaceX, Solar City, Boring, OpenAI, Hyperloop). To make matters
worse, he is also an incredible micromanager. I read that he interviews
(or at least used to) every new employee who joins Tesla and SpaceX.
It is clear that Musk is quite exhausted, and his behavior is becoming
more erratic. In a conference call snafu in April, he called the British
diver who saved the Thai cave kids a "pedo" on Twitter. This sort of
thing undermines Musk's Iron Man image - if he loses that, the
confidence game is lost and Tesla is done.
Another red flag went up recently: Musk started to attack short sellers.
A short seller who went under the name of Montana Sceptic posted
negative research on Tesla on Twitter and SeekingAlpha. Elon Musk
personally called the man's employer and threatened a lawsuit if the
employer didn't silence Montana Sceptic. Historically, companies that
have gone after short sellers have had something to hide or were playing
a confidence game. (The short sellers were interfering with the
misdirection to shiny objects.)
Tesla investors are still fascinated by the shiny objects, but I note
that CDS insurance on Tesla's bonds prices in a 24% risk of default by
2025. I am not long or short the stock. But if I were long Tesla's
shares I'd be asking myself these questions. After all, you're
paying $50 billion for a company that trades completely on the spoils of
future dreams.
**Read my other articles on Tesla:**
Why I Canceled My Model 3 Order
Uninvestable Tesla
The Double Trap For Tesla Investors Predicting The Future
http://ima142.acemlnb.com/lt.php?s=e1b542c9ce4f9ce5bcf519816e7e7fce&i=264A291A5A2339
Digital Painting is by my brother Alex Katsenelson
Schumann - Piano Quartet in E Flat Major
Today I'd like to share with you an excerpt (part 2) from the
**Piano Quartet in E Flat Major,**
**by Robert Schumann. This is one of those pieces that when you hear
it for the first time, it captures your heart and soul and you cannot
stop listening to it. It is very simple and beautiful.**
Click here to listen
**Vitaliy Katsenelson, CFA**
Student of Life
I am the CEO at Investment Management Associates
, which is anything but your average
investment firm. (Seriously, take a look .)
I wrote two books on investing, which were
published by John Wiley & Sons and have been translated into eight
languages. (Even in Polish!)
In a brief moment of senility,
**Forbes** magazine called me "the new Benjamin Graham." (They must have
been impressed by the eloquence of the Polish translation.)
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