It’s the question that puzzles pundits and makes short-sellers see red: Why isn’t Tesla broke yet? The company has posted losses almost every quarter since its founding, but not only does it remain in business, it steadily rolls out new products and opens up new markets, as Tesla fanboys cheer and the stock (over the long term) has soared.
Many have sought an answer to this consequential question – the latest is the Youtube channel The Rest of Us, in a charmingly childlike animated video that explains Tesla’s unique financial model in the simplest of terms.
Above: Exploring the financials at Tesla (Youtube: The Rest of Us)
In short, Tesla isn’t broke because it isn’t running out of cash. Theoretically, losses can continue indefinitely, as long as the kitty is regularly replenished. But where does the cash come from? Some comes from the sale of vehicles – Tesla earns a healthy margin on each car it sells (despite the disingenuous claims of some naysayers), and it sometimes even gets cash in the form of deposits before it even builds a vehicle (a clever financial feat that’s the envy of other automakers).
However, even as Tesla rakes in piles of money from product sales, it shovels out much more. Whence cometh the cash to top up Tesla’s reserves? Some is borrowed (debt financing), but more comes from the stock market (equity financing). Why do investors keep buying shares in a company that perennially loses money? Because savvy investors don’t base their decisions on what a company is doing today, but on its prospects for the future. Tesla is focused on the future like no other automaker, and has steadily invested huge sums to prepare for a future in which it sees huge opportunities.
Many articles about Tesla and other high-flying tech companies use terms such as “burn rate,” which can give the false impression that the cash that’s coming in just disappears, frittered away, heedlessly tossed to the winds, flushed down the…you get the idea.
Back in 2016, Vincent Paver, writing in Medium, made some good points as he explained that, far from throwing its cash in the fireplace, Tesla has invested much of it in capital goods – handy things like factories, machine tools, robots and charging facilities. Paver points out that, at the time of writing, Tesla had “burned” $1.6 billion over the last 12 months, but the book value of its equipment had increased by $2.8 billion over the same period. Other expenditures, such as vehicle development costs and employee training, may not result in tangible bricks-and-mortar assets, but they are also investments, as they allow Tesla to create new products that it can sell for more lovely cash.
Paver concludes that what we have here is not a company that is recklessly flinging away money, but one that is “in a capital-intensive business, and is [investing] substantial but appropriate sums of money on equipment and capacity expansion, tied directly to strong end user demand.”
And there you have the real key to why the callow California carmaker hasn’t gone belly-up, and won’t if current trends continue. The demand for Tesla’s products is strong – the backlog of Model 3 orders remains huge, and Models S and X continue to sell at a steady pace. Yes, not being able to produce vehicles fast enough to meet demand is a problem, but the reverse would be much worse. If Tesla’s waiting list disappears, and sales figures start going down, then it will truly be time to worry about the company’s cash flow.
Paver calls Tesla “a rare example of a public company aggressively chasing a market opportunity many multiples greater than its current scale.” Elon Musk’s new compensation plan, which was recently approved by shareholders, envisions the automaker growing to a market cap of $650 billion, which would make Tesla one of the five largest companies in the US. If and when that happens, rest assured that plenty more cash will be burned along the way.
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Note: Article originally published on evannex.com by Charles Morris
Tesla (NASDAQ: TSLA) is being called “the biggest meme stock we’ve ever seen” by Yale School of Management Senior Associate Dean Jeff Sonnenfeld, who made the comments in a recent interview with CNBC.
Sonnenfeld’s comments echo those of many of the company’s skeptics, who argue that its price-to-earnings ratio is far too high when compared to other companies also in the tech industry. Tesla is often compared to companies like Apple, Nvidia, and Microsoft when these types of discussions come up.
Fundamentally, yes, Tesla does trade at a P/E level that is significantly above that of any comparable company.
However, it is worth mentioning that Tesla is not traded like a typical company, either.
Here’s what Sonnenfeld said regarding Tesla:
“This is the biggest meme stock we’ve ever seen. Even at its peak, Amazon was nowhere near this level. The PE on this, well above 200, is just crazy. When you’ve got stocks like Nvidia, the price-earnings ratio is around 25 or 30, and Apple is maybe 35 or 36, Microsoft around the same. I mean, this is way out of line to be at a 220 PE. It’s crazy, and they’ve, I think, put a little too much emphasis on the magic wand of Musk.”
Many analysts have admitted in the past that they believe Tesla is an untraditional stock in the sense that many analysts trade it based on narrative and not fundamentals. Ryan Brinkman of J.P. Morgan once said:
“Tesla shares continue to strike us as having become completely divorced from the fundamentals.”
Dan Nathan, another notorious skeptic of Tesla shares, recently turned bullish on the stock because of “technicals and sentiment.” He said just last week:
“I think from a trading perspective, it looks very interesting.”
Nathan said Tesla shares show signs of strength moving forward, including holding its 200-day moving average and holding against current resistance levels.
Sonnenfeld’s synopsis of Tesla shares points out that there might be “a little too much emphasis on the magic wand of Musk.”
Elon Musk just bought $1 billion in Tesla stock, his biggest purchase ever
This could refer to different things: perhaps his recent $1 billion stock buy, which sent the stock skyrocketing, or the fact that many Tesla investors are fans and owners who do not buy and sell on numbers, but rather on news that Musk might report himself.
Tesla is trading around $423.76 at the time of publication, as of 3:25 p.m. on the East Coast.
Elon Musk
Elon Musk affirms Tesla commitment and grueling work schedule: “Daddy is very much home”
The remarks came as Tesla shares crossed the $400 mark on the stock market.
Tesla CEO Elon Musk reiterated his commitment to the electric vehicle maker and its future projects this week, responding to speculation following his $1 billion purchase of TSLA stock.
The remarks came as Tesla shares crossed the $400 mark on the stock market, extending a rally fueled in part by Musk’s TSLA purchase.
Elon Musk’s nonstop work schedule
Amidst the reaction of TSLA stock to Musk’s $1 billion investment, Tesla owners such as @greggertruck noted that “Daddy’s home.” Musk replied, stating that “Daddy is very much home.” He then shared details of a packed weekend of work, which was definitely grueling but completely within character for a “wartime CEO.”
Musk did note, however, that he had lunch with his kids during the weekend despite his extremely busy schedule.
“Daddy is very much home. Am burning the midnight oil with Optimus engineering on Friday night, then redeye overnight to Austin arriving 5am, wake up to have lunch with my kids and then spend all Saturday afternoon in deep technical reviews for the Tesla AI5 chip design.
“Fly to Colossus II on Monday to walk the whole datacenter floor, review transformers and power production (excellent progress), depart midnight. Then up to 12 hours of back-to-back meetings across all Tesla departments, but with a particular focus on AI/Autopilot, Optimus production plans, and vehicle production/delivery,” Musk wrote in his post.
Wartime CEO
Wedbush analyst Dan Ives described Musk as operating in “wartime CEO mode,” highlighting autonomous driving and AI as a trillion-dollar market opportunity for Tesla. Musk reiterated this point late last month as well, when he outlined the several projects he is juggling among his numerous companies. At the time, Musk stated that he was busy with Starship 10, Grok 5, and Tesla V14. This was despite his notable presence on X.
With Tesla Master Plan Part IV being partly released, the company is entering what could very well be its most ambitious stage to date. To usher in an era of sustainable abundance, Tesla would definitely require a “wartime CEO,” someone who could remain locked in and determined to push through any obstacles to ensure that the company achieves its goals.
Elon Musk
Tesla analyst says Musk stock buy should send this signal to investors
“With Musk’s (Tesla stock) purchase, combined with the upward momentum for delivery expectations and robotaxi rollout, we are becoming more bullish.”
Tesla CEO Elon Musk purchased roughly $1 billion in Tesla shares on Friday, and analysts are now breaking down the move as the stock is headed upward.
One of them is William Blair analyst Jed Dorsheimer, who said in a new note to investors on Monday that Musk’s move should send a signal of confidence to stock buyers, especially considering the company’s numerous catalysts that currently exist.
Elon Musk just bought $1 billion in Tesla stock, his biggest purchase ever
Dorsheimer said in the note:
“With Musk’s (Tesla stock) purchase, combined with the upward momentum for delivery expectations and robotaxi rollout, we are becoming more bullish. This purchase is Musk’s first buy since 2020. To us, this sends a strong signal of confidence in the most important part of Tesla’s future business, robotaxi.”
Musk putting an additional $1 billion back into the company in the form of more stock ownership is obviously a huge vote of confidence.
He knows more than anyone about the progress Tesla has made and is making on the Robotaxi platform, as well as the company’s ongoing efforts to solve vehicle autonomy. If he’s buying stock, it is more than likely a good sign.
Tesla has continued to expand its Robotaxi platform in a number of ways. The project has gotten bigger in terms of service area, vehicle fleet, and testing population. Tesla has also recently received a permit to test in Nevada, unlocking the potential to expand into a brand-new state for the company.
In the note, Dorsheimer also touched on Musk’s recent pay package, revealing that William Blair recently met with Tesla’s Board of Directors, who gave the firm some more color on the situation:
“We recently participated in a meeting with Tesla’s board of directors to discuss the details of Musk’s performance package. The board is confident of its position in the Delaware case and anticipates a verdict by end of year. It does not expect a similar situation to occur under new Texas jurisdiction. Musk has the board’s full support, and we expect he’ll get more than enough shareholder support for this to pass with flying colors.”
Tesla stock is up over 6 percent so far today, trading at $421.50 at the time of publication.
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