The term “coffin corner,” applied to aerodynamics, describes a condition where an airplane is flying so high and fast that the airspeed required to keep it aloft is essentially equal to the “critical Mach number” speed to keep it stable. In other words, the only place to go is down in a wing stall, or slower, or most likely, both.
Tesla Motors is flying in a coffin corner, and while the company has the long-term capability to go supersonic, and even hypersonic, right now, it’s unable to break that barrier. I think pretending that it can is detrimental to the long-term prospects of a great idea and actually not a bad execution given the reach of the vision.
Let’s review a bit before Tesla releases its Q1 financials.
- $TSLA stock is trading at a massive premium, despite losing 30% of its value since December 2018. Its earnings per share has gone from a profitable $0.84 on 12/31/18 to $-4.19 at the end of March.
- Elon Musk owns 21.7% of Tesla stock, and has personally pledged nearly 40% of his stock as collateral against personal debt. That’s a market value of $4.4 billion. Since 2010, that percentage has increased over 3700%.
- Despite repeated announcements of an “autonomous” self-driving future, Tesla is nowhere near that reality. It will take much more R&D (i.e. money) and time to get there, where Alphabet’s (Google’s) Waymo, Ford’s Argo, and GM’s Cruise Automation are actually closer. Skeptics are not impressed.
- Tesla’s suppliers are paying credit-card level debt service for Credit Default Swaps in case of Tesla’s default on accounts payable. This will likely (and there are signs of it) lead suppliers to begin demanding better payment terms, or cash on the barrelhead.
- Tesla’s Balance Sheet is a terrible mess. On paper, the company is $1.6 billion short in current assets should its suppliers and creditors call debt. In accounting terms, that’s called insolvency.
- Panasonic, Tesla’s longtime investor, and its partner in its Gigafactories and its main supplier of batteries, is showing troubling signs of a crack in the supply chain. Panasonic owns all the battery manufacturing line equipment at the Nevada Gigafactory, and has cancelled plans for future expansion.
- In fact, Panasonic has taken the nearly-unprecedented step of going to the Japanese business press to publicly complain about Tesla (a real no-no in honor-bound Japan). Without Panasonic, Tesla’s energy business, as well as its car business, is in peril.
- Nvidia, Tesla’s AI Autopilot chip supplier, publicly lambasted the company for making improper comparisons of Tesla’s own Full Self Driving chip against Nvidia’s products.
None of this, obviously, is good news.
The good news is that Tesla can turn a profit if it wants, through accounting revenue recognition tricks (like redefining its Autopilot feature to recognize more customer deposits, for example) and cashing in EU energy credits. But those are one-time parachutes to bolster a stock that’s in the coffin corner.
What are Musk’s options?
He could persuade investors to give him more time to execute on the AI self-driving promise. So far that hasn’t worked. He could get more people to order Model 3’s right now. But for various reasons, that is an uncertain proposition in the short term.
He could beg suppliers for forgiveness, but with a junk-bond credit rating, there’s only so much he can do, because of the above issues with suppliers. Panasonic and Nvidia are both rather upset right now, and other suppliers are worried about their own cash flow.
He could raise cash again and dilute his shareholders. This would, however, have the effect of greatly cutting $TSLA stock value. That, in turn, could panic Musk’s personal credit holders into calling their loans where he used his stock as collateral. That, in turn, would force Musk to sell shares to raise the cash, which in turn would further depress the stock. A death spiral.
OR…Musk could sell Tesla to a cash-rich buyer. Nothing in this litany of problems can’t be solved by a relatively small (in terms of global finance) cash infusion. Maybe $5 or $10 billion would solve all of Tesla’s problems. The biggest problem Tesla has is that it has no useful way to raise that $5 to $10 billion.
As P.T. Barnum once said, the last dollar is the feather that breaks the camel’s back. If you’re short, you’re short. And Tesla is horrifyingly, painfully short.
If I were Elon Musk, I’d be looking for a buyer, quietly, tweetlessly, behind the scenes. I’d let the inevitable “stall” happen and let the stock price begin to fall, not precipitously, but as gently as possible. I’d continue paying suppliers on time (there’s no evidence Tesla is not paying), conserve cash (they are), and sell as many cars as possible (again, this is what they’re doing).
Then, when the stock settles into strike-price range, the white knight can come in and buy the whole thing. They’d be foolish to drop Musk as part of the deal–he’s the heart and soul of the company. This way, Musk can stay onboard, working for a new, cash-flush, master. I believe this is what he wanted to do when he made those inopportune tweets about “funding secured,” but maybe he’s going about it the right way now.
Personally, I think Tesla is better off remaining public, but that may not be possible if the new buyer takes it off the market.
Then again, maybe against all odds, Tesla will go it alone and survive. But like an airplane flying in the “coffin corner,” some laws of physics and finance just won’t bend.