Tesla Is Coming to Its Financial Senses. That Has Its Own Risks.
By Peter Eavis
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Tesla, the electric car company defined by the moonshot mentality of its C.E.O., Elon Musk, has started to act with apparent caution.
Out of a desire to show some profits, Tesla said on Tuesday that it was laying off around 9 percent of its work force. The announcement came a month after Tesla said it was reducing its forecasts for capital expenditures, a move that would conserve some cash.
Mr. Musk almost certainly has not given up his dream of creating a society-changing, sustainable energy company. Indeed, his compensation plan, announced earlier this year, relies on an ambitious expansion. And many investors still believe in Mr. Musk’s boldness, with Tesla’s stock having soared from its recent lows as investors regain faith.
Still, sizable layoffs and moves to conserve cash typically are not the acts of growth companies that are having just a little trouble achieving their goals.
And there is a danger for Tesla if it starts to behave like a normal company: Investors may start to value it as one, and its highflying stock may tumble.
For most of Tesla’s history, Mr. Musk has proposed groundbreaking new products and convinced investors to finance them. The challenges of this approach became clear with the Model 3, a sedan aimed at a broader customer base than its previous cars. Its production problems have weighed on Tesla’s cash flows, leading some analysts to predict that the company will have to raise more money in the markets.
Mr. Musk has said that he does not plan to ask investors for more money in the coming months, and Tesla’s reduced capital expenditure forecast and the new push for profitability appear to be part of his efforts to avoid that. But even if this rough patch passes, and the company makes it through it without raising significant amounts of new capital, investors may be less willing to believe in the next grand vision.
And it is still not clear that Tesla’s plants can produce cars as efficiently as those of established automakers. Investors might then be skeptical that the company can generate enough cash to finance its regular operations and fund new projects, like the Tesla Semi, that wow the company’s strongest supporters.
That may force the company to take a more circumspect approach to growth and how it communicates its dreams.
Of course, a more conservative approach would reduce the chance that Tesla will face cash shortages. And shareholders would get a more dependable grasp of Tesla’s future profitability.
But investors would probably then value the company much more on its core current earnings and place much less emphasis on products that are years from production. That could weigh heavily on its shares. Jeffrey Osborne, an analyst at Cowen, forecasts that Tesla will make $8.73 per share in 2020. If Tesla traded at 20 times those earnings — a multiple well above that of the wider stock market — the company’s stock would change hands at $175, roughly half the level of where it closed on Tuesday.
Becoming sensible may save Tesla. But perhaps not its stock price.
Peter Eavis
Our columnist Andrew Ross Sorkin and his Times colleagues help you make sense of major business and policy headlines — and the power-brokers who shape them. Get the DealBook newsletter.
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