Elon Musk is to Tesla what the late Steve Jobs was to Apple. Both have made their mark as chief executives inextricably linked to the companies over which they preside. As with Apple during the days of Jobs, news about Tesla - its past, its present and its future - is as much about the personality at the top, as it is about the product portfolios these visionaries sought to produce.
Of course, Jobs’ legacy is a company that has endured in spite of his passing, and in his absence, Apple just became the first ever company to achieve a market capitalization in excess of a trillion dollars. Those who thought Apple would flounder without Jobs have been proven wrong.
Elon Musk is not going away any time soon, of course, but the company seems to be at an inflection point where it can either go to scale profitably, or succumb to the weight of debt and cash flow problems. Back in the day of course, people bet against Jobs. He was forced out of Apple over internal disagreements, but the company eventually brought back again. Will people bet against Musk now?
It’s no secret that Musk has pinned the future success of the company on the Model 3, Tesla’s smallest and cheapest car that will either prove - or disprove - the company’s ability to become a true mass producer of automobiles.
Achieving that status comes with the imperative of manufacturing cars profitably, and Musk determined that building the gigafactory to control production of a reliable source of batteries - at the right price - would be an essential component of reaching profitability. Equally essential would be hitting a production level, of at minimum, 5,000 cars per month to generate necessary revenues.
And here we are. The Gigafactory now employs 3,000 people and is the biggest battery factory in the world, while at the end of the second quarter of this year, Tesla met those production goals, too, though the company was a few months late getting there.
Still, reaching the production target was an impressive feat, and involved the company going to remarkable and unprecedented lengths to pull it off: building an entire production line under a tent at their Fremont, California factory. It’s hard to imagine that anyone but Musk at the helm would have applied the necessary drive to make that happen. And as we now know from the New York Times interview, at his own personal sacrifice.
We don’t have to weep for Musk, but still, do we bet against him?
Certainly, not all in the garden is rosy. As this Bloomberg piece shows, while Q2 production has risen sharply as Model 3 production has ramped up, cash flow remains severely negative.
This week, the Wall Street Journal reported that in a recent survey of Tesla’s suppliers, 18 of 22 said that they are worried that Tesla provides a financial risk to their businesses. The WSJ says delays this year in the production of the Model 3 drained Tesla’s cash, which fell by $1.13 billion in the first six months of this year and as of August 12 leaves the company with cash and cash equivalents of $1.69 billion on hand. So, not a huge buffer considering the burn rate. Nonetheless, all suppliers surveyed said they wanted to sustain or grow their business with Tesla - so there’s still faith out there.
There’s no room for complacency though. In order to stem the cash flow problem, The San Francisco Chronicle reported this week that Tesla is slashing spending. The Chronicle details that in June the company announced it would lay off 3,500 employees, about 9 percent of its workforce, while Tesla also plans to cut capital expenditure by a quarter this year. Analysts quoted in the piece say that while this might help achieve profitability, it won’t help Tesla bring new models to market. Indeed Bloomberg’s article points out that the Model S sedan is already an aging model, (it launched in 2012) and that while it’s still a fancy car, it no longer excites.
To that point, how long does Tesla remain the most prestigious electric vehicle money can buy? Bloomberg points out Jaguar, Audi, Porsche and Mercedes are all expected to come out with electric cars, starting as early as next year. Competition is certainly coming from established luxury brands.
Remember though, Tesla isn’t just a car company - which isn’t altogether good news either. Back in 2016, Tesla acquired SolarCity, a solar panel installation company run by Musk’s cousin, for $2.6 billion. While enveloped in Tesla’s financials now, this Forbes article from June - which comes with part of the headline reading “SolarCity is dying” - details that SolarCity effectively cost Tesla $5 billion, because on top of acquisition costs came $2.9 billion in debt. Worse still, Forbes says that legacy debt starts coming due in November of this year.
Who knows, the negative cash flow exposure, debt obligations, as well as pressure from traders shorting the stock might have, in part, been the stimulus to prompt Musk to tweet out he was thinking of taking the company private at $420 a share. As we now know, this announcement was based on preliminary talks with Saudi Arabia’s sovereign fund, with the impromptu announcement attracting the attention of the SEC.
Yet despite all this, and despite some roller coaster antics of the share price over the last week, Tesla’s stock is still impressive. As of press time, the company’s market capitalization still remains more than $16 billion, or over 40 percent more valuable than Ford’s. Wall Street clearly doesn't think the lights are about to go out.
Perhaps this proves that despite Ariana Huffington suggesting Musk needs to get more sleep, like Steve Jobs before him, Elon Musk remains credited with being a visionary, and the stock price suggests the market still believes he can pull all of this off. It doesn't appear to be a slam dunk though. While Jobs’ legacy is the most valuable company the world has ever seen, Musk still has much work to do if Tesla is going to eventually bring it home. Some will bet against him to be sure, but it’s still all about the future it seems - as long as the company can keep pumping out those Model 3s.
Image credit: JD Lasica/Flickr
Phil Covington holds an MBA in Sustainable Management from Presidio Graduate School. In the past, he spent 16 years in the freight transportation and logistics industry. Today, Phil's writing focuses on transportation, forestry, technology and matters of sustainability in business.