Can Tesla Outrun Cash Burn?

April 7, 2018

Amid mounting worry about the company’s cash burn, Tesla said last week that it would “not require an equity or debt raise this year, apart from standard credit lines.”

The statement helped Tesla shares (ticker: TSLA) to their best week in over two years, up 12.5%. Tesla also said it had just produced 2,020 of its new Model 3 sedans in the last seven days. That’s a big jump in output, but it still missed the company’s forecast of 2,500 a week by first-quarter end.

It turns out making cars is hard. “I’m back to sleeping at factory,” Tesla founder and CEO Elon Musk tweeted Monday. “Car biz is hell…” Tesla’s skeptics have been saying that for years, even as the company’s stock soared on hopes that Tesla could go from niche to mainstream, pumping out more than 500,000 cars a year. In recent weeks, more investors have begun to realize Tesla’s challenge. Musk, who sometimes promises more than he can deliver, seems to be taking it more seriously, as well.

After becoming the most valuable American car maker last year, Tesla’s recent struggles have knocked its market value back to $50.6 billion, once again behind General Motors’ (GM) $52.7 billion. With a value of $44.6 billion, Ford (F) is in third place. The math here has never quite made sense, given that Tesla delivered 103,000 vehicles in 2017, while GM sold nearly 10 million and Ford almost seven million. Both, unlike Tesla, are profitable.

So, yes, the car business is hard. But GM and Ford have spent a century trying to make it easier. Tesla is only at the beginning of that journey. Investors paying up for its stock would be wise to heed Musk’s latest concession.

-- Alex Eule

Last Week

Tech Under Pressure

Tech stocks slid, then stabilized, hit by everything from presidential tweets (Amazon.com), more data-privacy woes (Facebook), operating anxieties (Tesla), and everyday change (Apple may replace Intel chips with its own in new smartphones). Tesla produced over 34,494 cars in the first quarter—the stock rose 6%—with CEO Elon Musk admitting how difficult car making is. And Spotify Technology successfully went public in a rare direct listing.

Wild Markets

The U.S. added a modest 103,000 jobs in March, leaving the unemployment rate at 4.1%. The VIX averaged 21 for the week, and the Dow industrials ended with a 572-point thud. For the week, the Dow was down 0.71% to 23,932.76; the Standard & Poor’s 500 fell 1.38%, to 2604.47; and the Nasdaq Composite dropped 2.1% to 6915.11. The 10-year Treasury ended at 2.78%; oil ended at $62. Bitcoin fell to $6,600.

Trade War Moves

On Tuesday the U.S. drew up a list of 1,300 Chinese products worth $50 billion in exports. On Wednesday China retaliated with 25% tariffs on U.S. exports, including soybeans, cars, and aircraft. President Trump tweeted that the U.S. had to close its trade deficit with China and his new economics advisor, Larry Kudlow, suggested U.S. tariffs might be a negotiating ploy. Stocks recovered—until Trump doubled down with another $100 billion in tariffs.

Back to the Border

The White House spun hard right on immigration. In a series of tweets, the president declared U.S. law at the border worthless, decried a “caravan” of Hondurans marching through Mexico, blamed Democrats for killing the program that would protect young immigrants brought to the U.S. as children, and said that without a wall, which hasn’t been funded by Congress, he would deploy the National Guard on the border. He also said he would bring troops home from Syria.

CBS Eyes Viacom

CBS made a much-anticipated below-market bid for Viacom, offering $12.5 billion. CBS said its management, led by Chief Executive Leslie Moonves, would control Viacom if it won the bid. Sumner Redstone’s National Amusements holds 80% voting stakes in both companies. Redstone’s daughter, Shari Redstone, controls National Amusements and said she supports the deal.

Fox Maneuvers for Sky

Rupert Murdoch’s 21st Century Fox (which shares ownership with Barron’s parent) offered Walt Disney the chance to buy Sky News, a channel of satellite broadcaster Sky, to convince U.K. regulators of the unit’s independence from Fox’s other news assets. Fox is trying to buy its remaining stake in Sky, while selling a variety of media assets to Disney. Meanwhile, Comcast made an offer for Sky that tops Fox’s, stirring speculation that Murdoch may have to go higher.

Now the Teachers

Oklahoma teachers walked out over low pay and inadequate funding for the state’s schools. The protests follow teacher walkouts in West Virginia, which produced a pay raise; Kentucky, where teachers are resisting a new pension plan; and Arizona.

Pruitt Under a Cloud

Environmental Protection Agency head Scott Pruitt rolled out plans to reduce emissions standards on vehicles, only to find the plan, and his tenure, beset by a pileup of scandals.

Edited by Robert Teitelman and Teresa Vozzo

Email: editors@barrons.com

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