While Tesla's Finances Are Scary, Thank Goodness for Elon Musk

While Tesla's Finances Are Scary, Thank Goodness for Elon Musk
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The Southern California sky is known for beautiful sunsets. Yet one evening last month, there was something extra to behold. Something… spectacular.

I was driving, about a mile from home, when I saw it. An object steadily cascading across the aqua and golden sky. It looked like an orb. In its wake—a long, glowing trail. It was unlike anything I’d ever seen before.

Are other drivers noticing this thing, I wondered?

Cars began tapping their breaks. One driver pointed their phone toward the sky, capturing a photo. Yep—other people were noticing alright.

I was hoping the object would stay visible long enough for me to show my two young boys. When I arrived home, I yelled, “Nicholas, Zachary – quick, get out on the balcony. I want to show you something.”

It was still there, thankfully. “Check that out guys,” I said pointing up.

Nicholas, immediately mesmerized, exclaimed “Wow! Dad, I think I know what it is, it’s probably Santa!”

“You’re probably right, buddy. It’s probably Santa,” I replied with a smile.

You can’t blame a six-year old for making that guess on December 22nd.

Actually it was a SpaceX rocket, launched from the Vandenberg Air Force Base in central California.

SpaceX CEO, Elon Musk, seemed to enjoy the speculation of bewildered onlookers. He tweeted, “Nuclear alien UFO from North Korea.”

That rocket I saw was carrying satellites, which helps the company pay its bills for now. But Musk has much bigger plans. By 2024, he wants to transport humans to Mars. 

***

A client recently asked me to buy her shares in one of Elon Musk’s other ventures, Tesla Inc. (TSLA).

I gently pushed back, saying things like:

*     “It’s capital intensive, and they’re burning through cash.”
*     “We have no idea no idea what profitability will look like five years from now. So, how can we value it?”
*     “The auto manufacturing business is brutal—over 2,000 firms came and went in the last century.”

You get the drift.

After my points failed to persuade her, we compromised and bought a little for her account.

As a discretionary money manager, I normally make proactive buy and sell decisions for my clients. And I would normally never buy TSLA.

My process primarily revolves around evaluating what I can see in the here and now. I start with the story told by the financial statements. For TSLA, that tale is akin to a horror story.

Tesla is spending as much as General Motors every quarter — about $1 billion, to sell only a fraction of the vehicles.

Tesla cut production of its more lucrative Model S and X by 11% year-over-year in the fourth quarter to reallocate resources to the newer Model 3. But average weekly assemblies of Model 3 were just 186 units in the quarter, compared with the original guidance of a 5,000 a week by the end of 2017.

Aside from its production woes, TSLA faces more competition on the horizon. For instance, General Motors announced an intention to have 20 electric-vehicle models by 2023. BMW and Mercedes are ramping electric vehicle production too.

Whereas GM is turning invested capital into steady profits, Tesla recently posted a big loss. GM has a $25-billion war chest. Tesla faces a scary debt wall in 2018-2022, along with a capital spending budget that will likely stay above EBITDA.

Tesla also has a complicated balance sheet. The firm and its subsidiaries have used a mix of debt instruments, including convertibles and nonrecourse debt, to limit interest expense during its ramp-up growth phase.

But hey—some people like horror movies, and some investors are willing to overlook these concerns.

What motivates someone to invest in TSLA is a story about the future, belief in Elon Musk, and a vision for what TSLA’s financial statements will look like in five or ten years.

Even though it’s not an investment I’d make, I am glad others have the optimism to fund the future and make bets on the Elon Musks of the world.

I admire Musk. I’m glad he’s out there pursuing his passions, trying to change the planet for the better.

I’m thankful for a moment of wonder he put in my son’s eyes, as he watched that rocket sail across the sky.

I’ll be glad if he’s successful colonizing Mars.

Here are two reasons we should all celebrate dream chasers, even if we don’t personally invest in them.

Reason #1: Chasing dreams is important

There’s nothing exciting about the status quo. Human beings are motivated by progress. Sharks can’t breathe unless they swim forward, and human psychology functions similarly.

I wasn’t alive to witness Neil Armstrong step foot on the moon. So, I don’t know what it felt like to be a spectator in that moment. But my guess is, most people were proud—maybe even to the point of exhilaration.

The fire of capitalism has many individual candles—every member of society is one in his or her own way. However, candles require a spark to burn. Entrepreneurs and their early stage investors are the matches which ignite everything.

The flame of that rocket burning bright across a California sky was symbolic of what lights the fire of the American economy. Personal initiative. Courageous entrepreneurship. Pushing the envelope in a quest to do something new. Something better, cheaper, or faster.  

Not everyone has the self-starter motor required of an entrepreneur, and that’s ok. But it’s a benefit for all that some of us do have that motor.

“You want to wake up in the morning and think the future is going to be great - and that's what being a spacefaring civilization is all about. It's about believing in the future and thinking that the future will be better than the past. And I can't think of anything more exciting than going out there and being among the stars.” - Elon Musk

Reason #2: Chasing dreams is hard

Entrepreneurship is not for the faint of heart. In a study by Statistic Brain, the failure rate of all U.S. companies after five years was over 50%. After 10 years, its over 70%. To fight those odds takes a special kind of spirit.

It’s easy to marvel at SpaceX today, but when it was founded in 2002 it consisted of Musk, a few employees, an office with fresh carpet, and little else. Well, other than the mariachi band Musk hired to celebrate the occasion.

Team SpaceX, 2002

Starting something from scratch is hard because there’s no momentum. It’s straight uphill, only resistance.

Yet there are people who relish the challenge of climbing mountains. And people like Elon Musk who relish the challenge of building a company.

Let us not forget, the United States of America exists because of founders who had a similar spirit. That is, a willingness to do what’s hard now, in exchange for a better future.

 “Being an entrepreneur is like eating glass and staring into the abyss of death.” - Elon Musk

A few years ago, on the campaign trail, President Obama said, “If you’ve got a business—you didn’t build that. Somebody else made that happen.” 

He was heavily criticized for that remark. To be fair, the full context of his comments made it clear he wasn’t totally knocking entrepreneurs, but asserting their initiative alone isn’t what makes the American economy hum. Rather, in his view, government support mechanisms also contribute.

Still, the President’s remark touched a nerve—especially among entrepreneurs—and I can understand why.

Tell Amazon founder Jeff Bezos “he didn’t build that.”

But first, consider he left a cushy hedge fund job to start an online bookstore in 1994, when many people were just getting an email address much less buying anything on the Internet.

Tell Nike founder Phil Knight “he didn’t build that.”

But first read his memoir, Shoe Dog, where he recalls countless sleepless nights worrying about how to keep his fledging shoe company afloat.

Tell Elon Musk “he didn’t build that.”

But first, try eating glass.

***

Here is a 1-minute clip from Elon Musk’s interview with 60 Minutes. It captures the spirit of a true entrepreneur.

Michael Cannivet is the founder, portfolio manager and President of Silverlight Asset Management, an investment advisory firm serving high net worth private clients.

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