On June 3rd, 2019, enthusiasm for Tesla stock hit rock-bottom. Over 40 million shares of the company had been sold short, bankruptcy predictions were all the rage on both Twitter and the bond markets, and Tesla was coming off one of the most underwhelming quarters in company history. The stock price also hit a 2019 low of $176.99 per share on that day.
But as I type these words, on January 13, 2020, Tesla is trading at 530.98 per share during after-hours trading. Tesla stock has tripled in just 7 months. Let’s explore some of the factors leading to Tesla’s recent stock performance.
When investors think about any stock tripling, instinctively they start looking for positive catalysts that might have caused the company to triple. Did the company create a new hit product? Did they expand margins dramatically? Did they patent a revolutionary technology?
But the question investors rarely ask, and perhaps the more interesting question, is “What negative outcomes caused the company to hit rock bottom in the first place?”
Because it’s the negative catalysts that opened up the opportunity for smart investors to triple their money. That’s what matters to investors. Everyone knows Tesla’s business is doing great now, but all their recent wins are now priced in. We want to understand why investors didn’t believe in Tesla back in June.
Three main catalysts caused investors to worry back in late May and early June of 2019:
- Tesla’s sales were disappointing
- Tesla was burning cash
- Tesla’s debt was coming due
The first catalyst for Tesla’s poor stock market performance was Tesla’s Q1 delivery result. In early April, Tesla announced that they had produced 77K vehicles, but only delivered 63K vehicles, due to some unexpected challenges that forced many deliveries into the following quarter (Q2 2019).
Both production and delivery were below Tesla’s Q4 figures, but to be fair those Q4 figures were also all-time highs for Tesla. Also, Q1 is typically the worst quarter of the year for auto sales, so Tesla’s drop in sales looked worse on paper than it really was.
Deliveries were still up over 100% YoY, but the drop in sequential deliveries threw off some investors. But despite underwhelming vehicle production and deliveries in Q1 2019, this wasn’t horrible in isolation.
It’s only when we combine the disappointing sales with Tesla’s cash burning problem, that declining sales become really concerning.
On the very first line of Tesla’s Q1 2019 earnings report, they wrote:
"We ended the quarter with $2.2 billion of cash and cash equivalents, a $1.5 billion reduction from the end of 2018."
Now we can start to see why Tesla’s stock was free-falling in late spring. Not only did Tesla disappoint on Q1 sales, but Tesla also went from $3.7 billion of cash on December 31, 2018 to just $2.2 billion three months later. It doesn’t take a genius to see that one or two more quarters of similar losses would lead to insolvency.
And to make matters worse, 35% of Tesla’s remaining $2.2 billion cash balance consisted of refundable customer deposits. That was $768 million of Tesla’s cash balance that customers had the right to pull away from the company at any time.
But Tesla’s situation was even worse than that. At the end of Q1 of 2019, Tesla had $1.7 billion of debt payments that still needed to be paid within 12 months, plus another $9 billion of debt coming due in future years.
Not a good situation for any company to be in, especially one running out of cash and struggling to get profitable. For most of Tesla’s history, profits have been sporadic at best. So it’s not hard to imagine a short-seller licking their chops and doubling down as they see a $10 billion wall of upcoming debt approach an unprofitable, cash-burning startup.
But as we already know, Tesla did turn things around. And those shorts have been burned to ashes.
All those Tesla vehicles in transit at the end of Q1 were shipped to customers in Q2, helping the company generate over $600 million of free cash flow. And on top of that, the company raised over $2 billion in financing to bring their cash balance to an all-time high of $5 billion by the end of June.
A huge win for the company, and a relief for investors everywhere. That combination of healthy free cash flow and extra financing was enough to quell fears of bankruptcy, and pay off short-term debt obligations. But it didn’t stop there.
Since that Q2 report, Tesla has continued winning. Tesla generated another $371 million of free cash flow thanks to record deliveries in Q3, and I expect Tesla will report a cash balance over $6 billion at the end of December given their Q4 production and deliveries records.
And as all these wins started to pile up for the company, the Tesla narrative has shifted too. Instead of:
- Disappointing sales
- Burning cash
- Debt deadlines
Tesla’s situation today looks a lot more like:
- Consumer demand is off the charts
- Cash flow positive
- Debt is funding further growth
Now Tesla’s stock tripling makes a lot more sense, with the help of a 20/20 hindsight. The company went from almost certain bankruptcy to firing on all cylinders in a matter of months. Analysts are upgrading the stock, new factories are being built, and margin-boosting software updates are rolling out to existing Tesla owners, while other automakers struggle to deliver comparable electric vehicles. What's not to love about that?
I don’t know where Tesla will trade from here on out, and anyone telling you different is probably wrong. But I do know one thing. Elon Musk is not one to bet against. Let this article serve as Exhibit A for any short-sellers out there.
He’s been living on the edge of bankruptcy for over a decade now, with his entire net worth tied up in Tesla and SpaceX, even leveraging himself to fund his day to day expenses and additional stock purchases. And somehow, he just keeps on finding ways to win.
If you haven’t read Elon’s biography, the stories of his improbable victories go back years. Anyone betting on the future of Tesla would be wise to learn from his past track record.