Coyote Blog

I guess I should not be surprised at this in a company headed by Elon Musk, but this is just straight-up cronyism of the worst sort (emphasis added):

The U.S. Air Force, which leads Pentagon space efforts, has spent the last five years reorganizing how the military and intelligence agencies get their satellites into orbit. Pursuant to congressional mandates, it has had three goals: (1) stop using Russian rocket engines, (2) assure access to all key orbits by selecting two capable launch providers, and (3) foster competition between those providers to discipline price and performance.

The service has made good progress, sharing the costs of developing new launch vehicles with prospective providers and preparing to select two winners next year. But now comes Representative Adam Smith (D-WA), Chairman of the House Armed Service Committee, with a plan to overturn the Air Force’s efforts by arbitrarily giving up to $500 million to the one company that failed to win a launch services agreement from the service in competitive bidding last year.

The losing company was Elon Musk’s SpaceX, which failed to convince the Air Force it had a suitable plan for assuring safe and reliable access to space for all planned military payloads. Under Rep. Smith’s proposal, which is contained in the pending 2020 National Defense Authorization Act, SpaceX would get a huge windfall of taxpayer money so that it can continue competing against the three companies that won development agreements in last year’s awards. As reporter Sandra Erwin observed at SpaceNews.com on June 10, “Smith’s provision would give SpaceX access to government funds that it did not win competitively.”

Smith’s proposed language is Washington politics at its worst. According to the Air Force, if it becomes law U.S. access to critical national security orbits will be endangered, the military will need to rely longer on Russian rocket engines, and the cost of all national-security space missions will increase. As if that were not enough, the Air Force says Smith’s proposal would reward an uncompetitive offeror while punishing successful competitors who have been sharing the cost of developing launch vehicles with the government.

For instance, the Smith provision would require other companies in the race for launch contracts to turn over intellectual property they have developed to SpaceX in order to level the playing field. In addition, the Air Force says that the requirement in Smith’s language for early notification of Congress before future contracts are announced would create the perception that Congress influenced the outcome.

My family often jokes about my obsessive behavior vis a vis Tesla and Elon Musk (on the off chance you are unaware of my thoughts, the most recent are here).  My daughter texted me last night that "Wealthy millennials seem to love Elon."  And that is true.  My answer to her is the title of this post, "People who express opinions outside of their domain seldom have really looked into it much."

Of course, I am not in any way arguing for some sort of strong credentialism wherein people should not express opinions outside of their domain.  God forbid, I would have to shut down this blog.  But I am saying that just because someone is really smart and successful at A does not necessarily mean their opinion on B is worth squat.  As always, as a consumer of opinions, caveat emptor should always be the watchwords.

The first time I really encountered this phenomenon (outside of obvious examples such as the political and economic opinions of Hollywood celebrities) was related to climate change.  I don't see them as often today, but for a while it used to be very common for letters to circulate in support of climate change science signed by hundreds or thousands of scientists.

The list of signatures was always impressive, but when you looked into it, there was a problem:  few if any of the folks who signed had spent any time really looking at the details of climate science -- they were busy happily studying subatomic particles or looking for dark energy in space.  It turned out most of them had fallen for the climate alarmist marketing ploy that opposition to catastrophic man-made global warming theory was by people who were anti-science.  And thus by signing the letter they weren't saying they had looked into it all and confirmed the science looked good to them, they were merely saying they supported science.

When some of them looked into the details of climate science later, they were appalled.  Many have reached the same general conclusions that I have, that CO2 is certainly causing some warming but the magnitude of that warming or in particular the magnitude and direction of its knock on effects like floods or droughts or tornadoes, is far from settled science.

So it is often the case that people who show strong support for ideas or people outside of their domain do so for reasons other than having made use of their expertise and experience to take a deep dive into the issues.  Theranos is a great example from the business world.  Elizabeth Holmes convinced a bunch of men (and they were mostly all men -- women seemed to have more immunity to her BS) who were extraordinarily successful in their own domains (George Schultz, the Murdochs, Henry Kissinger,  Larry Ellison) to become passionate believers in her vision.  Which is fine, it was a lovely vision.   But they spent zero time testing whether she could really do it, and worse, refused to countenance any reality checks about problems Theranos was facing because Holmes convinced them that critics were just bad-intentioned people representing nefarious interests who wanted her vision to fail.

Which now brings us to Tesla and Elon Musk.  I used to love Elon like everyone else.  I still think that having four or five billionaires in a space race against each other is finally the world I thought I was going to get growing up reading Heinlein.  The Tesla Model S was probably one of the most revolutionary cars of the last 50 years.  But he lost me when he committed outright fraud in the Solar City - Tesla deal and since then have only become more skeptical about he and Tesla.

I sort of laugh when folks tell me that really smart successful rich people believe in Tesla.  You mean like James Murdoch, on the board of Tesla and who also was lost his entire investment in Theranos?  Or like Larry Ellison, an adviser and fan of Elizabeth Holmes who invested $1 billion in Tesla just 6 months ago and has already lost 40% of it?   The window on this is probably closing, but over the last 10 years if you wanted to get Silicon Valley investors to throw a lot of money at you, find a traditional bricks and mortar business and devise a story in which you take that industry and convert its economics to that of the networked software world (see:  Uber, WeWork, Tesla, and even Theranos is some of its strategic pivots).

Or how about true millennials and Elon Musk?  Name a wealthy millennial supporter of Elon Musk and Tesla and I can bet you any amount of money they have not looked at Tesla's balance sheet or cash flow or the details of its global demand trends.  They have not thought about its dealership strategy or manufacturing strategy and the cash flow implications of these.  They just like what Elon says.  It sounds big and visionary.  They buy into Elon's formulation that he is saving the environment and everyone opposed to him is in a cabal with big oil (ignoring the fact that Elon routinely uses his Gulfstream VI to commute distances less than 60 miles).  So saying that rich millenials adore Elon is effectively saying that they want to be associated with the same things Elon says he is for -- the environment and space travel et al.

Elon Musk is Ferdinand DeLesseps.  He is PT Barnum.  He is Elizabeth Holmes.   He is the pied piper.   He is fabulous at spinning visions and making them sound science-y.  But he is not Tony Stark.  There is a phenomenon with Elon Musk that everyone thinks he is brilliant until they hear him speak about something about which they have domain knowledge, and then they realize he is full of sh*t.  For example, no one who knows anything about transportation or physics or basic engineering has thought his Boring Company and Hyperloop make any sense at all.  His ideas would have been great cover stories for Popular Mechanics in the 1970's, wowing 13-year-old boys like me with pictures of mile-long cargo blimps and flying RV's.  He is like a Marvel movie that spouts science that is just believable-enough sounding that it moves the plot along but does not stand up to any scrutiny.

All of this would be harmless if he was not running a public company.  I don't really care about the rich folks who were duped by Elizabeth Holmes, but hundreds of thousands of small millenial investors who have totally bought into the Elon hype are literally putting their last dollar into Tesla, and sometimes borrowing more.  Tesla shorts often laugh at these folks on Twitter, calling them "bagholders," but it is a tragedy.  Unless Tesla finds a sugar daddy sucker, and the odds of that are getting longer, I think it is going to end badly for many of these investors

As a disclosure, I have been short Tesla via puts for a while now.  It you really want to understand Elon, the best book I can recommend is The Path Between The Seas about the building of the Panama Canal.  First, it is a great book you should read no matter what.  And second, Ferdinand DeLesseps is the best analog I can find for Musk.

A prior version of this article was published accidentally before it was complete.

I know I swore not to write about Tesla here and to confine myself to talking about Tesla on Twitter, but I can't help myself.  This is the company that is going to spawn a thousand business school case studies.  It is Enron but in the Internet Age with more transparency (or at least less sophistication in hiding their problems).

Over the weekend I re-read "The Smartest Guys in the Room" about the collapse of Enron.  I will admit I was an Enron fanboy at the time -- I drank the Kool-Aid and totally overlooked the problems.  I knew Jeff Skilling a little and worked for him on Enron when we were at McKinsey.  I believed he was brilliant and was doing what he said he was doing.  The crash of Enron took me years to accept, and only on my recent second reading of that book did I have the distance and objectivity to really understand it.  And I realized something else -- I was the same guy back then that I criticize today.  Skeptics of Tesla (including me) make fun of Tesla fanboys and their cult of Elon Musk and their belief of everything he says and their certainty he is the smartest guy in the room.  I understand them because I was that guy with Enron and Skilling.  Maybe Tesla is my chance to correct my past gullibility.

Anyway, just when I thought the story couldn't get any more dramatic (or weird), Elon Musk raises the bar.  Apparently Tesla is now only tangentially and largely irrelevantly an automobile manufacturer.  Instead, it is an autonomous ride-sharing company:

Citigroup and Goldman Sachs, who are underwriting Tesla’s latest effort to raise $2 billion in new funds, held a “broad investor call” on Thursday, where CEO Elon Musk and CFO Zach Kirkhorn answered brokers’ questions about their plans for the electric vehicle maker.

According to two invitees who attended the call, CEO Elon Musk talked up Tesla’s self-driving strategy right off the bat, expanding what he and other execs said at a recent event for investors that the company dubbed “Autonomy Day. ”

Musk confidently told investors on the call that autonomous driving will transform Tesla into a company with a $500 billion market cap, these people said. Its current market cap stands around $42 billion. He also said that existing Teslas will increase in value as self-driving capabilities are added via software, and will be worth up to $250,000 within three years.

This call was in the context of Tesla's offering this week of about $2 billion in new stock and convertible bonds.  The really interesting thing about the call:  Virtually 100% of the discussion on the call was about ride-sharing and autonomy, while neither word was even mentioned in the official written prospectus for the offering.

Before we can understand what the hell is going on here, and why Tesla is going all-in on a business it was barely talking about 60 days ago, we need to do some review.  I want to review where Tesla was last time I wrote about them, and also discuss new Tesla news and actions over the last 3-4 months.  From there, we will try to dissect what Elon Musk is doing.  TL;DR: I believe Musk is doing exactly what Jeff Skilling did at Enron, chasing new business strategies based on what stories he thinks will most likely goose the stock in the short term, rather than which strategies make the most sense in the long-term for his investors.

Where I was on Tesla at year end 2018

I had a lot of criticisms about Tesla's strategy towards the end of last year (here and here, for example).  But let me summarize some of the key points

• Tesla has taken what was already a risky entry into a capital-intensive industry and has made it even more expensive and risky by choosing to own both the dealer network and fueling networks for its cars -- this means it has to invest not only in auto manufacturing capacity but also in a world-wide network of sales and service centers and in a global network of charging stations
• Inexplicably, just as its production volume began ramping up in mid-2018 with the introduction of the mid-priced model 3, Tesla ramped down on its capital spending, R&D, and SG&A spending.  By the first quarter of this year, capital spending was no longer even keeping up with maintenance needs.  This was absolutely inexplicable for a growth company that has promised many new products in the near future (new coupe, semi truck, model Y crossover), all of which will need a plant and equipment to produce.  Further, Tesla slowed investment in its sales, service, and charging networks at the exact time its fleet size exploded, leading to a lot of customer dissatisfaction
• The decrease in these expenditures was likely tied to Tesla's hard to fathom (I seem to be searching for a lot of synonyms for "inexplicable")  decision not to raise capital last year.  Its stock was over $350 a share and it had huge momentum from its first two profitable and cash flow positive quarters.  By almost everyone's analysis, they should have raised $5 billion or more, which might have only created 10% dilution.  (Instead they waited until this week after a terrible quarter and after the stock had fallen to about $235 to raise just $2 billion, barely enough even to fill their accounts payable hole).
• Tesla and Musk claimed that the growth and performance of the 3rd and 4th quarters of 2018 were harbingers of the future and he extrapolated hockey sticks from these data points.  Skeptics like myself believe that this was merely a one-time bulge, that Tesla had sold through 2-3 years of demand in their order book in just 2 quarters, and that the first quarter would be a disaster now that the tank was dry.  In addition, Tesla has culled its order book of all the highest margin variants where it could actually make money, leaving what remained of the unfilled orders as low-margin variants it was barely worth selling.  [By the way, I figured none of this out on my own, and owe a lot to the great folks at $TSLAQ on Twitter, who bring a lot of free research to bear that made it easy to see these patterns].
• My admiration for Musk as having really shown the automobile world that electric cars can sell at high price points (and not as little sh*tboxes) and for his space entrepreneurship really ended with the SolarCity deal.  In that deal, Tesla shareholders overpaid for a failing business simply to bail out Musk and his family from a sinking ship.  The acquisition made absolutely no strategic sense and Tesla has done zero to try to develop it, and in fact has been slowly shutting it down from the moment it was purchased.
• Elon Musk has steadily lost any credibility he might have had by initiating product launches of products he claims are nearly ready for sale but never get introduced.  Tesla got a higher level of subsidy from California based on a single suspicious battery swap demo that has never been repeated or even discussed since.  Musk sold SolarCity to Tesla in part based on a flashy reveal of a solar shingle product that still has not seen the light of day.  Musk had a big reveal of the Tesla semi and started taking customer deposits but there are still no clear plans for its production.

What has happened at Tesla this year

• The first quarter of 2019 was a disaster, with deliveries down despite initiation of Model 3 sales in Europe.  Worse, since the Model 3 seems to be cannibalizing Model S and X sales, Tesla was not only selling fewer cars but its mix shifted to lower priced less profitable cars.  It lost an enormous amount of money, and only after the conference call with analysts about first quarter results did Tesla reveal that this loss would have been far worse without a huge sale of government EV credits
• Tesla burned a staggering amount of cash in the first quarter, and was forced to pay off nearly a billion dollars in debt when the stock price did not remain high enough for the debt to convert.  While Tesla's cash balance at the end of the quarter looked OK, there were two huge red flags. First, the cash barely covered a huge hole Tesla had in its net working capital.  Second, given the large number of vehicles Tesla sold in its end of quarter push in the last 2 weeks of the quarter, it appears that Tesla was nearly out of cash in Mid-March and perhaps days away from a default (analysis below).
• The Tesla financial statements still include a number of unexplained oddities, including a billion dollars of accounts receivable, or about 20% of quarterly revenues.  How does a company that demands payment in advance before delivery have 20% of its quarterly revenues tied up in receivables?
• Tesla announced, out of the blue, that it was closing all its retail stores and going online only.  Given the drop in demand for the quarter, it was a head-scratcher as to why eliminating the sales force was going to help.  The decision seemed to be almost off the cuff, as Tesla seemed surprised that they would still have to continue paying their expensive long-term mall leases.  After this was revealed, Tesla partially reversed the closure decision, but no one -- including their own retail folks -- seems to know what the plan is now.
• Tesla constantly fiddled with its prices and model lineup.  It cut prices several times, but also announced a small raise as well.  It eliminated certain options for cars, added new ones, and then reintroduced eliminated ones.  Even long-time Tesla watchers are confused about the model lineup today.
• Tesla continued to see an outflow of executive talent, including the exit of their very well-respected new General Counsel after just over one month on the job  (Mr. Buttswinkas returned to his old law firm and purged Tesla from his resume).  This seemed to parallel the rapid exit of an outside chief accounting officer last year who gave up millions of dollars to exit in just 60 days.
• April car deliveries stayed on the same pace as the first quarter -- ie, way worse than Tesla's guidance
• Elon Musk continued to get in trouble with the SEC, firing off production and sales guidance on Twitter that was different from Tesla's official published guidance.  Mr. Musk and Tesla are still guiding to a total delivery number for the next year that is well in excess of what most anyone else looking at the first four months believes is possible
• Tesla announced a reveal of their Model Y crossover that will not go on sale until at least the end of 2020.  Unlike past Tesla reveals, this one seemed hastily set up and the prototypes shown were weird.  They looked more like the existing Model 3 with a few modifications than a promised crossover that could incorporate a third row of seats.  Tesla asked customers to start making deposits (skeptics will argue that the whole point of the reveal was just to get some free financing from Tesla fanboys) but unlike past reveals, this one fell flat.  There was apparently little interest in making deposits, though Tesla (unlike with past products) has not revealed the deposit numbers.
• Lyft went public for over $20 billion and Uber is planning a $70+ billion IPO, despite having a history of negative earnings and promising investors they may not make money for 10 years (more on this in a minute)
• After the Model Y went nowhere, Tesla set up what they called "investor autonomy day."  Tesla outlined their strategy for creating a fleet of self-driving cars, and promised fully autonomous cars by the end of 2020.  With these fully autonomous cars, Musk promised that Teslas would become an appreciating asset in that they earned income for their owners as autonomous taxis when the owners were sleeping.  He also said Tesla would own a fleet of taxis itself, using off-lease model 3's for this purpose.
• As described at the top of the article, Tesla raised over $2 billion on verbal promises by Tesla (not echoed in the deal prospectus) that Tesla was soon to be a $500 billion autonomous taxi company

So what is Tesla doing?

Having written all of the above, I realize I have left so much out -- the product quality problems, the worker lawsuits, the autonomous driving deaths, the spontaneous car fires -- but I only have so much time.  If you are interested, @teslacharts on Twitter is a good place to follow Tesla from the skeptic side.  But given all this, what the hell is going on?  The following is my theory.

I think in the 3rd quarter last year, Elon Musk honestly believed that the huge ramp in sales and profits at Tesla represented Tesla permanently turning the corner.  He extrapolated from that growth and believed it would continue for years -- he did not see it as simply the one time working through of years of pent-up orders and demand.  As a result, he put off the capital raise he should have been doing, and instead had dreams of taking the company private and getting away from all the scrutiny by analysts and shorts that seem to irritate him.  Thus was launched the ill-considered "420" tweet when he claimed he had funding secured for a go-private transaction at $420 a share, when in fact this was an outright lie.  Once the SEC stepped in to investigate, a new funding round was almost impossible.

Then, in the first quarter, reality hit Tesla in the face.  For all their public optimism, Musk had to see that the demand he expected was not there and Tesla was likely running low on cash.  I think Musk had convinced himself the convertible bonds due in the first quarter would surely convert (and would have at the third quarter stock price) but now Tesla was doing the opposite of raising capital, it had to pay off debt.  Cash was going out the door and demand was weak.  What to do?

Musk has a demonstrated pattern that whenever he needs the stock price to be higher, or he needs to sell stock, or he needs some other kind of favorable financial outcome, he will do a new product demo. It worked for battery swap and the solar shingle and the model 3 and the semi, so it would work again.  The model 3 reveal had collected hundreds of millions of dollars of cash in the form of deposits.  That's what he needed now.  The problem is, they didn't have a prototype to show.  I believe Musk had the company hastily create a Model Y prototype built on top of a model 3.  It did not really have to work, it just had to be something he could talk about.  Interestingly, his VP of engineering quit at exactly this time, for reasons unknown -- was their some internal dissention about this Y prototype?

Anyway, the Model Y reveal was essentially a flop, and likely garnered few deposits.  Certainly not enough to fill in Tesla's growing cash hole.  And by Mid-March, Tesla may have been almost out of cash.  Tesla says it delivered half its vehicles for the quarter in the last 10 days of March, so about 31,500 were delivered in those hectic days.  At an average price of $50,000 each that would mean Tesla brought in nearly $1.6 billion in cash those last 10 days (this is conservative, may have been more if the average price was higher).  But they only had $2.2 billion at the end of the quarter, meaning Tesla was scraping bottom in mid-March, particularly since hundreds of millions of that cash is restricted and not supposed to be spent.

Somewhere in this period of March-April, after his usual product reveal trick with the Y did not work, I think Musk came to the conclusion that the Tesla car business as currently defined was not going to work.  Or, more accurately, it was never going to make enough money to support its sky-high stock valuation.  I have always said that Tesla would make a fine $10 billion niche car company, but nothing about it justifies a $50 or $60 billion valuation.  But at this point Musk can't accept a $10 billion company, even though that would ostensibly still leave him a very rich man.  But like Ken Lay at Enron, Musk has borrowed against at least half his Tesla stock and a falling stock price could lead to financial death by margin call (Musk, for some reason, also mortgaged all his multi-million dollar homes last December). His other investments are also struggling -- SpaceX has been unable to attract the capital it needs of late and Musk has poured a lot of money into the Boring company, an absolute embarrassment of a company that helps refute, in my mind, his "smartest guy in the world" rep.

As Musk looked around for a way to save the stock valuation, the Lyft and Uber IPO's must have had an influence.  Uber is losing as much money as Tesla and folks are talking about it IPO-ing at a market cap of $70 billion.  What if Tesla could call itself a ride-sharing company, only better.  Wouldn't that garner Tesla an even higher valuation?

So I see investor autonomy day and Musk's autonomy soliloquy on the capital raise call the other day as evidence that Musk has, in his mind, capitulated on auto manufacturing and has decided the way to keep Tesla's stock price up is to promise it will -- in just 20 months -- sell fully autonomous vehicles and be making tons of money selling taxi rides.  In other words, it is a robotaxi company that happens to be backward integrated into manufacturing the taxis.

I am skeptical for a number of reasons.

• This reeks of desperation and capitulation.  If Dell says they are going to reinvent themselves as a search engine, it's time to sell the company
• There is no evidence that Tesla can achieve full autonomy by end of next year and a lot of reasons to think they can't.  Most experts think full autonomy is decades away, and when they rank companies on their progress on autonomy, Tesla is usually near the bottom (e.g here).  Waymo and GM, the leaders, often go thousands of miles between driver interventions.  Tesla is hundreds of times worse.   Even over the short course at Investor Autonomy Day (where Tesla likely trained and practiced in advance) investors reported a driver intervention was needed.  Now imagine the same car with no driver.  In snow with the road markings obscured.  Driving through construction where new routes are confusingly marked off with cones.
• The basic business numbers Musk throws around are absurd.  Just as one example, he extrapolates from current ride-share prices and assumes Tesla will make a ton of money because they will get the same price but not pay the driver.  But this is crazy.  If Tesla suddenly throws a million taxis into the rideshare supply equation, rates are going to fall.  Already, since 2012, Uber reports its average fare per mile has been reduced by over half.  If everyday folks are having their cars drive autonomously at night to earn extra money, the fee per mile is going to be competed down close to the cost per mile of operating the vehicle (or even lower, since most folks underestimate their all-in cost per mile on their vehicle).  Musk is basically proposing to commoditize the market but still reap premium margins.  Not going to happen.

Warning

Note that this article is simply my analysis and in some cases my guesses.  I think the story holds together but I can be wrong.  I am short TSLA via put options but note that this is a modest investment that is a small percentage of my portfolio.  Tesla is a dangerous stock to short.  Right through the bad news, individual investors at RobinHood have been loading up on the theory they are buying the dip.  20,000 people added TSLA to their portfolio at RobinHood just AFTER the horrible first quarter report.  Be very careful

Bonus -- Tesla's Largest Mistakes

No matter what happens, Tesla will always be remembered as the company that brought EV's mainstream.  But like any tragedy, they have made some fatal mistakes.  This is my attempt to get out ahead of future business school cases and rank their largest mistakes:

1. The Model 3.  Tesla could have been a profitable luxury car maker but with the Model 3 tried to go for the low to mid end of the market.  But it does not have the manufacturing expertise or cost position (it assembles in California, for God sakes) to pull it off.  The quality problems it encountered have reduced its brand luster, and the volumes of cars have overwhelmed its service and charging networks.  Investments in the Model 3 have distracted it from real refreshes of its S and X and in fact the Model 3 has cannibalized those more profitable cars.  A higher end crossover would have been a better choice
2. No third party dealers.  Tesla chose to bring the sales and service function in house.  This was a mistake.  Not only did it eat up capital, but it robbed it of valuable marketing partners such as Penske that could have really helped its sales ramp.
3. No 2018 capital raise.  Rather than tweeting 420, Musk should have been raising capital based on its third quarter results.  The money was there to be had and Tesla needed it.  $5billion at least could have been raised with little dilution effect
4. SolarCity Purchase.  This was a complete sham to bail out the Musk family and friends.  Did absolutely nothing for Tesla except drain billions of valuable capital
5. In-house Manufacturing.  Musk often says he wants to be like Apple, but Apple is a design company.  It does not manufacture and for quite a while did not do its own retail.  Tesla would have been better off finding a manufacturing partner rather than manufacturing itself in the highest cost location in the country
6. No Charging Partner. I think Tesla had to build out its charging network at first to eliminate one of the greatest consumer barriers to purchasing an EV.  But they should be partnering to share the costs.  Instead, Tesla still thinks of its charging stations as a competitive moat.  But as other car makers form consortia for charging networks based on faster charging technologies, Tesla is stuck with an expensive network that needs upgrading.  Its more of an anchor now than a moat

2nd Bonus -- Another Musk parallel if you are tired of Enron comparisons

Even more than Skilling and Enron, the person Musk most reminds me of is Ferdinand de Lesseps, whose attempt at building a French canal in Panama ended in spectacular failure.  I highly recommend the book "Path Between the Seas" for folks who want the whole story.  When I have time, I may post on the parallels. I presume Tesla critic @ElonBachman would agree since he uses de Lesseps' picture as his twitter icon but I have never seen him discuss it.

WeWork is a provider of work spaces for individuals and startup companies.  Unless I am missing something (and WeWork devotees are welcome to chime in) it is essentially a hipper rebranding of traditional small business office space and services companies like Regus (now IWG).

Currently, Regus / IWG has about $3 billion in annual revenue on which it makes something like a positive 5% net income margin and trades at a valuation of about 1x annual revenues.  WeWork is a private company, though is rumored to be IPOing soon.  It had $1.8 billion of revenue last year but lost $1.9 billion, meaning that it was basically selling $10 bills for $5 each with an negative net income margin of 105%.  Its last funding round was done at a $45 billion valuation, or 81 times 2018 revenue.  This valuation will likely go up in an IPO.

No real point here, except to say that I have not seen valuations this insane since the late 1990's.  What makes the examples of WeWork and Tesla perhaps even more incredible than examples in the 1990's is that the market is putting growth software valuations on bricks and mortar companies.  Oracle or Microsoft might have been expected to scale up easily and relatively cheaply, but scaling a real estate company takes a ton of money.  Not sure where the growth economy of scale is in office space.  And don't even get me started with the extrapolated growth projections here.  When the tech bubble bursts, WeWork is going to have a ton of grief on its hands, and unlike software companies it is not going to be able to slash SG&A by cutting payrolls.  It is going to be stuck in a lot of long term leases and mortgages that it can't break (just ask Tesla about that when they tried to cut SG&A by closing their stores).

PS-  As with Tesla and any number of other examples, many devotees of certain products hear criticism of the company's valuation as criticism of the company's product.  The two do not have to be related.  Grossly overvalued companies can still have products you might want to buy.  In fact, if WeWork is selling you a $10 product for $5, I would not be at all surprised if you are satisfied.

PPS-  This is not to say you can't make money in a bubble.  Careful, observant, and risk tolerant individuals can make money riding stocks up that they know are due for a crash some day.  Readers know that I believe Tesla is headed for a reckoning, but I am making money this week on short term calls I bought last week because I knew that Musk is going to pump the stock like hell last week and this week and pull forward every bit of volume he can into Q1 in a bid to save a dying growth story.  I bet the stock would ride up on early reports of this but fall off once financials are out and further when Q2 shows that the order books have been drained.  But this is risky, risky, risky.  It is a tiny piece of my investment portfolio and this sort of investing is but a hobby for me, a bar bet to determine if I have really come to understand how Elon Musk ticks.  Also, I am just a layman and not a professional so don't listen to me.

You folks can disagree with me about the prospects for the Tesla stock price.  You may hero worship Elon Musk and think he's a genius where I think he is a charlatan with PT Barnum promotion skills.  You may really, really love our Tesla car (I thought the Model S was a fine car when it first came out -- the Model 3, not so much).  But PLEASE do not rely on your Tesla autopilot.  Or at least read this Ars Technica article first.

A while back I went to a party in the suburbs of New York and needed a ride back to my hotel in the city.  A friend of a friend offered to give me a ride.  It turned out he was driving a Tesla Model X (SUV).  In the same way that you can't go 3 minutes with a Vegan without getting a diatribe on the virtues of veganism, for some distance in the ride we heard a paean to Elon Musk and Tesla.  This guy had really drunk the Kool-Aid.  Before my wife started kicking my ankle, I expressed a few of the reservations I had about the company and Musk, and the driver got really defensive. So much so he set out to prove Tesla's superiority.  So he drove us the rest of the way home (mostly) with his hands off the wheel through the freeways around Manhattan.  It scared the cr*p out of me, because I knew that while the AP could drive impressive distances and navigate on its own, it was only 99% reliable.  And since it makes hundreds of decisions every trip, those are not great odds.

What worried me is that he insisted on using the AP almost as a test of religious faith.  There is this weird dichotomy where all the Tesla literature that is actually reviewed by their lawyers and the DOT tell you never to take your hands off the wheel, but Musk goes on 60 Minutes bragging and doing exactly that (almost hitting another car) and verbally the company constantly brags on its AP capability.

This is crazy.  You only have to look at Boeing and the 737MAX experience to understand that even a very careful and experienced company like Boeing can screw up the software-hardware interaction  The 737MAX worked most of the time, just like the Tesla AP, but in Boeing's case you don't see consumers arguing that this makes it OK -- you see the DOJ initiating criminal investigations.  Tesla is a much less experienced and far less careful and organized company than is Boeing.  Despite Musk's bluster, third parties rank them close to dead last in self-driving technology development, but they are the only major self-driving provider who are actively encouraging their customers to use it outside of a carefully controlled test environment.   Everyone who actually understands AI believes Musk is totally full of sh*t when he talks about AI, particularly the much-hyped "shadow mode."

Interestingly, that latter reaction is the same one I hear from nearly everyone who hears Musk discuss something they actually know about. My moment came listening to Musk talk about the hyperloop, which is truly a crazy, unfeasible, uneconomic joke.  As I wrote before:

Elon Musk is not the smartest guy in the world.  He is clearly a genius at marketing and brand building.  He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.  A mile-long freight blimp!  Trains that run in underground vacuum tubes!  A colony on Mars!  But he suffers, I think, from the same lack of self-awareness many people develop when they are expert or successful in one thing -- they assume they will automatically be equally as brilliant and successful in other things.  Musk creates fanciful ideas that are exciting and might work technically, but will never ever pencil out as profitable business (e.g. Boring company, Hyperloop).

I watched the Ant-man and the Wasp the other night and listening to Musk is a lot like Marvel movie physics -- both use recognizable terms (if you had a drinking game in this last Ant-man movie that took a shot when they said "quantum" you would be dead now) that sound good to laymen but make no sense to people who actually understand the topic.  There may have been some excuse to lionize Musk's brilliance a year or five years ago, but how can anyone think this guy is anything but a knucklehead with an overcharged ego after the Boring Company fiasco?

Anyway, don't rely on this guy's reputation.  If you like what you see in the Tesla showroom (if there are any left), then by all means by the car.  But do not turn on the auto-pilot.  Please.  A loss of even one of you readers could... reduce my blog visitation by whole number percentage points.

Yes, I am like an addict on Tesla but I find the company absolutely fascinating.  Books and HBS case studies will be written on this saga some day (a couple are being written right now but seem to be headed for Musk hagiography rather than a real accounting ala business classics like Barbarians at the Gate or Bad Blood).

I still stand by my past thoughts here, where I predicted in advance of results that 3Q2018 was probably going to be Tesla's high water mark, and explained the reasons why.  I won't go into them all.  There are more than one.  But I do want to give an update on one of them, which is the growth and investment story.

First, I want to explain that I have nothing against electric vehicles.  I actually have solar panels on my roof and a deposit down on an EV, though it is months away from being available.  What Tesla bulls don't really understand about the short position on Tesla is that most of us don't hate on the concept -- I respect them for really bootstrapping the mass EV market into existence.  If they were valued in the market at five or even ten billion dollars, you would not hear a peep out of me.  But they are valued (depending on the day, it is a volatile stock) between $55 to $65 billion.

The difference in valuation is entirely due to the charisma and relentless promotion by the 21st century's PT Barnum -- Elon Musk.  I used to get super excited by Musk as well, until two things happened.  One, he committed what I consider outright fraud in bailing out friends and family by getting Tesla to buy out SolarCity when SolarCity was days or weeks from falling apart.  And two, he started talking about things I know about and I realized he was totally full of sh*t.  That is a common reaction from people I read about Musk -- "I found him totally spellbinding until he was discussing something I am an expert in, and I then realized he was a fraud."

Elon Musk spins great technology visions.  Like Popular Mechanics magazine covers from the sixties and seventies (e.g. a flying RV! a mile long blimp will change logging!) he spins exciting visions that geeky males in particular resonate with.  Long time readers will know I identify as one of this tribe -- my most lamented two lost products in the marketplace are Omni Magazine and the Firefly TV series.  So I see his appeal, but I have also seen his BS -- something I think a lot more people have caught on to after his embarrassing Boring Company tunnel reveal.

Anyway, after a couple thousand words of introduction, here is the update:  In my last post linked above, I argued that Tesla is a growth company that is not investing in growth.  Sure, it is seeing growth in current quarters due to investments made over the last decade, but there is little evidence it is actually spending money to do anything new.  It stopped managing itself like a growth company trying to maintain its first-mover advantage.

Tesla has explicitly chosen to pursue a strategy that needs a TON of capital.  Everyone understands, I think, that building a new major automobile franchise takes a ton of investment -- that's why they are not popping up all the time.  But Tesla actually has made choices that increase the capital needed even beyond these huge numbers.  Specifically, they chose not just to manufacture cars, but to also own the sales and service network and to own the fueling network.  Kia was the last major new brand in the US that I can remember, but when it started it relied on 3rd parties to build and operate the dealer/service network and relied on Exxon and Shell to build out and operate the fueling network.  So Tesla has pursued a strategy that they need all the capital of Kia and of the Penske auto group and of Exxon.  Eek.

And for years, they were valiantly trying to pull it off.  They created showrooms in malls and created a new online selling process.  They built some service locations but as has been proven of late, not enough.  They built a supercharger network.  It was a gutsy call that seemed to be paying off.

And then something weird happened.  Somewhere in late 2017 or early 2018 they stopped raising capital and greatly slowed down both R&D and capital investment.

• They slowed expanding the service network at the very time that their installed base of cars was going up exponentially and they were getting bad press for slow service.  Elon Musk promised that Tesla would create its own body shops but nothing has been done on this promise.
• They slowed the Supercharger network expansion at the same time their installed base has dramatically increased and at the same time new competitive networks were begun by major players like Volkswagen.
• They stopped expanding the Model 3 production line at the same time it was clear the current factory could produce only about 5,000 cars per day (with some quality tradeoffs at that) and Musk continued to promise 10,000 a day
• They promised production in China by the end of this year but so far the only investment has been a groundbreaking ceremony in a still muddy field
• They promised huge European sales but only just now got European regulatory approval for sales, dragging their feet for some reason on this approval despite lots of new EV competition starting to hit the European market.
• They pumped up excitement with new product concepts like the semi and the coupe and the pickup truck but there is no evidence they have a place to build them or even have started to tool up.
• Everyone thinks of Tesla as having leadership in battery technology but that is the one area they have actually outsourced, to Panasonic.
• Through all of this, through all these huge needs for capital and despite Tesla's souring stock price and fanboy shareholders begging to throw money at the company, they have not raised any capital for a year.

Since my initial post, we have seen a few new pieces of news

1. Tesla still has not raised capital and in fact faces a $1 billion bond repayment in just over 30 days
2. Tesla admitted that it has not even started working on a refreshed design for the aging Model S and X, despite increasing EV competition coming at this high end from Audi, Porche, and others.  These refreshes should have been started years ago.
3. In fact, Tesla announced it was cutting back on production of the S and X.  Ostensibly this was to focus on the Model 3.  Most skeptics think this is BS, and the real reason is falling demand.  But it doesn't matter -- growth companies with great access to the capital markets don't make these kinds of tradeoffs.  This is further proof that Tesla is no longer managing itself like a growth company.  These cuts are particularly troubling because the S and X are where Tesla gets most of its gross margins -- the Model 3 margins are much worse.
4. Tesla laid off 7% of its work force.  Again, this is not the act of a company that is behind in implementing its growth initiatives, growth initiatives that perhaps 80% of its stock market valuation depends on.

Tesla has always had an execution problem, or more rightly an over-promising problem.  But it was still actually investing and doing stuff, even if it was disorganized and behind in doing so.  Now, however, it is a company valued as an exponential growth company that is no longer managing itself like a growth company.  It has billions of investments that are overdue -- in new products, in product refreshes, in the service network, in a second generation supercharger -- that should have been started 2-3 years ago and for which there isn't any major activity even today.

As a disclosure, Tesla stock is one of the most dangerous in the world to trade, either way.  You really need to understand it before you trade it and no one really understands it.  I have a couple of long-dated put options on Tesla that I consider more of a bar bet than anything else.  I also have a couple of cheap short-dated calls as I usually do in the runup to the quarterly Tesla earnings call.  Musk is great at the last minute stock pump during earnings call week, and the stock often pops only to fall soon afterwards as people dig into the numbers.  But again, these are "investments" that are less than 0.1% of my portfolio.

Postrcript:  When I wrote "Tesla is a growth company that is not investing in growth" I was picturing the Jim Cramer cameo in Ironman -- "That's a weapons company that doesn't make any weapons!"  Of course it took a work of fiction to see Jim Cramer advocate for the short side.  Doubly ironic given Musk sometimes styles himself as the real life Tony Stark.

Readers will know that I have somehow been sucked into the Tesla vortex and spend too much time watching Tesla and Elon Musk's antics.  I tried to explain some of the reasons for this fascination here.  Every time I swear off following Musk, he does some new nutty thing, like his joke of a demonstration the other night of his Boring Company tunnel in LA  (as usual, Musk has come up with another idea that would look cool on the cover of a 1970's Popular Mechanics or Boys Life magazine but fails almost every engineering, physics, and business logic test).

Anyway, I am going to mostly resist writing about Tesla and discuss the strange bias many Americans (really, many Westerners) have against short-selling.  Here is a tweet from a random Tesla supporter that demonstrates what I see every day from Tesla fans:

In TSLA's case, SEC's purpose was the protect shortsellers - which aren't investors.

Bashing the SEC isn't illegal, they have no criminal authority.

— ThemeTeam (@ThemeTeamWP) December 21, 2018

lol no, shorts are not investors. They spread false information for profit and when proven wrong, they move to something else to stay relevant.

— ThemeTeam (@ThemeTeamWP) December 21, 2018

This notion that short sellers are not doing anything legitimate, that they do not deserve legal protections (or else should be banned entirely), and that they prosper only by spreading false information are not just a staple of hard core Musk fanbois, but are actually quite common attitudes.  I saw it just the other night watching the movie The Accountant again (a family favorite in part because a streak of OCD and Asperger's runs through my family).  In this scene, the guy talking is called Brax and he is a gangster and a mercenary, but for a variety of reasons the film-makers need to make him more sympathetic than the average thug.  Watch the justification he gives:

The movie-makers are expecting that the average viewer will discount his thuggery here because he is beating up a short-seller, and we all know those guys are unethical and destructive (by the way, I too would be tempted to short a company that has stuffed its workers' pension fund with its own stock, that is a big red flag to me).

Short selling, in which one is betting the value of an asset will go down in the future, is a perfectly legitimate and valuable way to participate in markets.  For those who are unsure what short selling is, here is how it works.  People who own large blocks of a stock, let's say Exxon-Mobil or XOM, can lend their stock, for a fee, to other people.  They do this as a way to generate extra income for their portfolio, particularly if they intend to hold the stock for the long term.  The people who borrow the stock then immediately sell it.  I know, this seems weird -- your neighbor who lent you his mower might be ticked off if you immediately sold it.  But folks who lend their shares know you are going to sell it.

So I borrow and sell 100 XOM shares for, say, $90.  If the price drops to $70, I can buy the stock back at that price and I make a $2,000 profit.  The risk, though, is that if the price keeps going up, I am going to have to buy back at a higher price and lose money.  If the price goes up too much, the broker is going to issue a margin call and likely force me to pony up more cash or buy back at the unfavorable price to cover my position.  If I had to sell at $110, I would lose $2000.

Note that short selling has a more dangerous risk profile than going long, or buying the stock.  If you buy 100 shares of XOM at $90, the most you can lose is $9,000 -- your losses are capped.  On the other hand your upside is unlimited -- if XOM goes up to $500, you make a fortune.  For short-selling, this is reversed.  The short-seller's gain is limited -- the most they can ever gain is $9,000 if the stock goes to zero.  But their losses are uncapped -- if XOM goes up to $500, they will have lost over $40,000.  And even if the stock shoots up to $500 and eventually falls to zero (as do many bubble companies that get shorted), it may be hard to ride the short position to the end, either due to margin calls or failure of intestinal fortitude.

Short selling makes a ton of economic sense in part because it HAS to improve markets.  First, it increases the liquidity of the market and the number and diversity of participants.  The more subtle reason is because markets and pricing are information discovery tools.  Short selling allows more people with information about a security to participate in this information exchange, which almost by definition improves the market.  As Don Boudreaux wrote years ago:

To ban short-selling of stocks is to short-circuit an important mechanism through which people share their knowledge and expectations with others.  Banning a mechanism that better allows share prices to reflect the expectation that the underlying assets are not worth as much as current market prices suggest does nothing to change the underlying reality.  Such a ban merely distorts knowledge of this reality

I like to think about economics and business issues but I am not an economist.  My layman's way of thinking about short selling was outlined in a post 10 years ago, written in reaction to a temporary ban in short selling during the market turmoil of 2008.

Someone noticed that just before certain stocks crash in value, there is a lot of short-selling.  So the US government has banned short-selling, at least temporarily.  Classic cargo-cult logic.

Boy this sure makes perfect sense in a time when we are concerned about speculative bubbles -- let's ban one of the most important tools that exist for bubbles to be shortened and made less, uh, bubbly.  Here is why (very briefly and non-technically) short-selling takes the edge off speculative excesses.

At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements.  For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset.  They start buying the asset, and the price starts rising.  As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers.  The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more.

Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios.  The ownership base for the asset is now disproportionately made up of those sky-is-the-limit bulls, while everyone who thought these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued.  But how does it come to earth?  After all, the only way the price can drop is if some owners sell, and all the owners are super-bulls who are unlikely to do so.  As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.

Thus, we have short-selling.  Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote for the value of the company.  Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.

If you want to understand the volatility of a stock like Tesla ($tsla), the issue often is not short-selling but the extremely tiny float -- only a very small percentage of the equity in the company actively trades, while the rest sit in hands of folks who are not going to trade or even lend the stock (e.g. Elon Musk).  With such a tiny float, small changes in sentiment lead to huge price swings, making it a hair-raising investment for both longs and shorts.  This situation would likely be worse without the shorts.

As for the supposed false information spread by shorts, I am sure that happens.  But information gathering by shorts is one of the reasons we should treasure short-selling.  Here is my analogy -- one of the few good things about having Donald Trump as President is that the media actually is doing its job and is skeptical of everything he says and does.  It digs into the truth of his every single statement.  And sometimes what the media comes up with is fake or wrong.  But I would still argue we are better off with this sort of accountability than we were with the media as lapdogs to Obama.  Just look at the problems and potential rights violations at the border.  The media ignored most all of this same activity when it was happening under Obama, but is rightly (finally) highlighting it under Trump.

Trump supporters hate the media, and argue that it was "long" Obama and "short" Trump, but whatever the reason, we are learning things we did not know before and knowledge has value.  Shorts play this same role in the market.  For years everyone fawned over Elon Musk and Tesla.  The dedicated EV magazines were basically house organs of Tesla, a sort of Tesla Pravda.  The longs did not want to see or hear any criticism.  Essentially, no one wanted to be skeptical of the Tesla story except the shorts.   The shorts may turn out to be wrong, but they are finding holes in the Tesla love story and that is valuable.

Postscript:  If you do not invest and want a tiny taste of the hate short-sellers engender, go find the hottest, rowdiest craps table in a Vegas casino and start betting the Don't Come line.

I am not a foodie you should normally trust, but if you are in San Diego you need to go to Breakfast Republic.  Yes, I know it is breakfast and brunch only but skip your evening meal and just go.  Most amazing breakfast I have had.  Been there several times to their Pacific Beach location.  If there was justice in the world, their founder would be as famous as Elon Musk.

PS - if you really, really insist on getting a traditional dinner recommendation, try cucina urbana, just a block or two away from the viaduct in Balboa Park.

I really like the Soul of Enterprise podcast, and was thrilled that they had me on for a full hour last week.  You can listen to the whole thing here.  We covered a lot of ground, from private management of public recreation to climate to health care and even to Elon Musk a bit.  Fair warning though, I am not sure that this sort of interview is really my best milieu, which is why I write most of the time.  These guys get some amazing guests and also cover some interesting topics.  I really liked the bit they did on the subscription model a week or so ago.

Nutty interview on Fox Business.

Stuart Varney is trying to complete a quest in which he must find information about Tesla's new board chairman.  He seeks out and starts questioning NPC Kimbal Musk, but the quest is apparently broken and the NPC only gives him information on some unrelated quest about planting a seed.

“Hi, and thank you for having me here,” Musk said after a perfunctory introduction from Varney. “I’m so excited about plant a seed day.”

Plant a seed day, you see, was the only thing that Kimbal Musk wanted to talk about Thursday morning on Fox Business. Varney, of course, had no interest in plant a seed day, what with him hosting a business show and all. He tried his level best to get Musk to talk about new Tesla chair Robyn Denholm.

“You are on the board at Tesla,” Varney said. “And you’ve got a new chair. Have you heard anything from her? Is she laying down law?”

“I am so happy for the future of Tesla,” Musk said. “On March 20, 2019 we’re going to do a plant a seed day…”

Varney interjected.

“Come on!” Varney said. “You are on board of Tesla — which is very much in the news. You’ve got a new chair to replace your brother, Elon Musk. You’ve got to tell me. Is she laying down law? have you had contact with her? What she’s saying? What she’s doing on the board?”

“I am very happy about the future of Tesla,” Musk said. “Let me tell you about a story…”

Varney interjected again, as it was clear that Kimbal Musk was about to pivot back to plant a seed day.

“I want to know what’s going on at Tesla with the new board chair, and you are on the board,” Varney said. “Can you answer the question? What is she doing? What do you know that she’s doing so far? I don’t need to know you’re happy about future of Tesla I want to know what your new chair is doing at Tesla on the board.”

“What I’d like to share I’m so happy about the future of Tesla,” Musk “And plant a seed day in 2019 will be a way for companies across America to participate.”

Varney, at that point, decided he’d had it.

“You think my viewers want to learn about PLANT A SEED DAY?!” Varney said. “THEY DON’T CARE!”

Musk tried one more time to get a plug in for plant a seed day. Varney gave up, and decided to shut down the interview.

In my extended article the other day about Tesla I wrote of Elon Musk

Elon Musk is not the smartest guy in the world.  He is clearly a genius at marketing and brand building.  He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.  A mile-long freight blimp!  Trains that run in underground vacuum tubes!  A colony on Mars!  But he suffers, I think, from the same lack of self-awareness many people develop when they are expert or successful in one thing -- they assume they will automatically be equally as brilliant and successful in other things.  Musk creates fanciful ideas that are exciting and might work technically, but will never ever pencil out as profitable business (e.g. Boring company, Hyperloop).

Seriously, go back and look at old popular mechanics covers.  Here is one in my domain:

The magazine specialized in really cool ideas that 14-year-old geeky boys like me ate up in the 1970s.  But most of them share in common with Elon Musk's ideas that they will never be practical.  So it is not surprising that Popular Mechanics put out an absolute puff issue on Elon Musk, apparently aimed at helping the man Popular Mechanics loves rehabilitate his reputation after getting some bad press for making false promises and breaking securities laws.   The piece was such a hopeless PR piece masquerading as journalism that the Atlantic felt the need to call them out for it.

Other readers, particularly journalists, were flabbergasted, including several Popular Mechanics staffers and contributors who declined to speak on the record because they feared jeopardizing their jobs. “It’s not the job of a magazine to do some PR recovery efforts for somebody exhibiting unstable behavior just because you like that he makes cool cars and rockets,” one Popular Mechanics writer said. (Disclosure: I worked at Popular Mechanics as a web intern for about a month in 2012.) For many journalists, the essay collection was a love letter bursting with unbridled, unfiltered admiration for Musk, a public figure the magazine covers, regularly and objectively. The material reads as if it came straight from the public-relations managers whose jobs are to make their boss look good.

In response to criticism the Popular Mechanics editor said:

D’Agostino said he decided to do the project after reading a slew of negative press of Musk and his properties, and, as he put it in the final collection, “myopic and small-brained” criticism. He cited as examples news coverage of the misleading tweet about Tesla, the ensuing SEC debacle, Musk’s weed experience on Joe Rogan’s podcast, and the entrepreneur’s relationship with the singer Grimes....

Musk, he said, is a good representative for the Popular Mechanics ethos. “It’s always been a magazine about what’s possible and the people who sort of tinker with things and solve problems with the aim and goal of improving human life and existence, and using technology to make things better,” he said. “When you look at someone like Elon Musk, we kind of think of him as one of us. He’s doing something very Popular Mechanics—you don’t know if it’s going to work, but he tries these things and gives it his all.”

I am perfectly willing to acknowledge Musk's good points, as I did in my long essay linked above, but in my opinion Musk is leading a lot of very naive investors over a cliff.  Go read the Tesla fan boards and the $tsla tag at twitter and you will see a series of investors who have never bought a stock before talking about how they put all their savings into Tesla.  Ugh.  Magazines like Popular Mechanics have some responsibility not to shamelessly tout a high-risk stock to naive investors.

For those who don't want to read my whole essay, the biggest problem at Tesla is that Musk has promised a lot of things, all of which take capital which it is increasingly clear Tesla does not have.  The promised Semi, pickup truck, coupe, solar shingle, China expansion, EU sales of the model 3, expansion of the sales and service network, bringing body shops in house, implementation of full self-driving -- not to mention repaying a growing accounts payable backlog and over a billion dollars in debt coming due in the next 6 months -- all will require billions of capital and Tesla is hitting bottom.  Musk claims he will be able to fund this with organic cash production but this almost has to be an outright lie.  He needs to raise equity, but has not done so when his stock was at all-time highs.  Now that he is in trouble with the SEC, rumors swirl that he may not be able to raise new capital.  If he cannot, Tesla will be bankrupt in 6 months or less.  Tesla might survive if it can find a white knight (though many of the obvious candidates have turned him down) but this is a lot of risk for noob investors to take on and a lot of risk to simply IGNORE in a Popular Mechanics puff piece.

Postscript:

By the way, is the balance problem on Elon Musk coverage really a dirth of hagiography? This is the man the press explicitly calls the real life Tony Stark.  If anything, he needs that guy referred to in the final seconds of the movie Patton, the person who rides with the Roman general during his Triumph and whispers in his ear that all glory is fleeting.  I have no problem talking about the wonderful things Musk has helped push forward (and I do) but good God aren't you obligated to also include stuff like this, out of his own mouth?

1/ This is crazy. Either this is a total BS excuse (which his $tsla fanboys will likely swallow) or Musk is the worst CEO of a $50 billion company I have ever heard of. $tslaq @TeslaCharts https://t.co/oeTfN9UaNU

— Coyoteblog (@Coyoteblog) October 18, 2018

You can click on the tweet and see my whole response, but eschewing 3rd party dealers and having its own sales and service network has been a Musk strategic pillar for 8 years.  The production ramp for the Model 3 is years behind.  And the CEO just looked at the map and realized they did not have enough service locations even for their less-than-expected sales?  This may be a great idea man and visionary and man who can get great efforts started, but this is not the tweet of a great, or even a good, CEO.

Just to save everyone from sending this to me, Elon Musk has been sued by the SEC.  The details are here, I will not go over all this old ground.  Of course this is just an accusation, and has no immediate effect (except to trash the stock price) until it is settled or proven in court.

I have such mixed feelings for Musk. On one level, it is awesome to see an entrepreneur trying to do build real stuff like rockets and cars. He has all the geeky charm of a 1970's edition of Popular Mechanics, breathlessly hyping captivating but sometimes impractical ideas.  I rode with an acquaintance in his $100,000 Tesla the other day and he loved it. Totally drank the Kool Aid.  Despite my extreme skepticism, he was sure that Elon was going to have same-day body shop repairs for Teslas and could make it work because they only had 3 models of cars with lots of shared parts.  It's the same sort of enthusiasm you see from people who still stand in line first day for the new iPhones. I envy being able to create that as a company.

On the other hand, Musk is just so unsuited to running a public company, is awful at operations, and will end up having cheated a lot of people.  He fails to meet commitments and makes public statements that are transparently absurd.  Just as one example, the other day in response to many delivery problems Tesla has (delivery problems that may actually be due more to efforts to shift 4Q sales into 3Q), Musk said there was a shortage of car delivery trucks and Tesla was starting to build them.  Seriously??? There is zero evidence of a delivery truck shortage and it is absurd to think Tesla had the time or the resources or the skills or knowledge to bang out large truck trailers (that require a variety of DOT inspections and approvals).  Honestly, I can't tell if Musk is the pointy-haired boss from Dilbert who promises absurd things because he is utterly clueless, or if Musk is totally corrupt -- it could be both.  I think his body shop insourcing idea was likely clueless but his SolarCity acquisition was corrupt.

New entries from Jaguar, Audi, and others demonstrate both that Tesla faces a lot of new competition but also that Tesla's original Model S and X still have a lead over competitors.  When the book on the electric car industry is written, I think it will be said that Tesla greatly accelerated the transition to electric cars.  But it is a fact of business history that the pioneer and innovator seldom is the ultimate victor (Lycos, Netscape, Altair, Yahoo, etc).  Tesla has not lost yet, but it still has a huge hill to climb.  Unfortunately, Musk's decisions to do so many things in-house -- own the dealer network, own the fueling network, own the manufacturing, own the body shops, etc. -- is going to require too much capital.

It is pretty clear that Musk is often using Apple as one of his models for what he wants to do with Tesla, and he has successfully created the same kind of almost cultish loyalty as has Apple.  But he ignored a lot of what Apple did.  Apple is a research, software, and design house.  It farms out manufacturing to a partner and sold most of its ipods and iphones initially through third party retailers.  If Tesla had done the same: taking advantage of rich third parties who already know how to sell cars as dealers; working with a consortium to create the fueling network; and going to someone like Kia to do private label manufacturing of the cars -- they might have lost something of the customer magic in the process but they also might be in a much better position to survive.

Update:  Apparently Musk was offered a very, very attractive settlement by the SEC which involved Musk stepping down as Chairman but NOT as CEO, adding a couple new directors, and paying a fine.  It is hard to read this as much more than a slap on the wrist, especially in the context of the SEC now seeking a full bar of Musk from any position at any publicly traded company (hell hath no fury like a government agency scorned).  Frankly, I find this nearly as impossible to understand as the fact that Tesla never raised any equity funding this year when its stock and story were so strong.  Tesla skeptics are arguing that both of these hard-to-explain events stem from the same cause -- that Tesla has some deep dark secret that Musk can't afford for either a new executive or a public offering document to disclose, the same secret (the story goes) that has driven away a number of senior accounting and finance officers in the last several months.  I agree that the existence of such a secret would explain the facts, but I can't imagine what could be much worse than the bad balance sheet and operational data that already is publicly known.

I promised I would not post any more Tesla for a while, and to some extent I am keeping that promise -- no updates here on the SEC investigation or the 420 tweet.  But since I have been critical of Tesla in the past, I thought I would acknowledge that there are good things in Tesla that could and should be saved.  The problem is that Tesla is saddled with a bunch of problems that are NOT going to be solved by going private.  In fact, going private could only make things worse -- given that Tesla already has too much debt and its debt is rated barely above junk bonds, piling on more debt just to save Elon Musk from short sellers is not a good plan.  Here is what I would suggest:

1. Find the right role for Elon Musk.  Musk HAS to be part of the company, without him its stock would go to about zero tomorrow.  But right now he is CEO, effective head of media relations, factory manager, and chief engineer.  Get him out of day to day management (and off Twitter) and hire real operating people who know what they are doing
2. Get rid of the dealerships.  Tesla tried to do something different, which is own all the dealerships rather than franchise them out.  This is fine if one has some sort of vision for doing sales and service differently, but Tesla really doesn't.  It does the same things as other car dealerships but just slower since it has not been able to build out capacity fast enough.  And this decision has cost them a tons of growth capital they desperately need, because they have had to build out dealerships most car companies get for "free" because the capital for the dealerships is provided by third-party entrepreneurs.  Also, the third-party entrepreneurs bring other things to the table, for example many of them tend to have experience in the car sales business and a high profile in their local markets with government and media.
3. If possible, find a partner for the charging network.  All traditional car companies get their fueling networks for free because the network is already built out by the oil companies.  Tesla is building its own, and again this is sucking up a lot of capital.  It is also dangerous, because Tesla has chosen to pursue a charging standard that may not become the industry standard (this is already happening in Europe) and Tesla risks being stuck with the betamax network.  Tesla should see if it can shift this to a third party, perhaps even in joint venture with other EV companies.
4. Do an equity raise.  To my mind, it is absolute madness Tesla did not do this earlier in the year.   Their stock was trading at $350 and at a $50+ billion valuation at the same time they were burning cash cash at a rate of $3 billion or so a year.  Musk says he can skate through without more capital but he has said this before and it was not true.  Given the enthusiasm for his stock, there is just no reason to run cash poor when there are millions of Tesla fanboys just waiting to throw money at the company.  Even a $5 billion raise would have been only 10% dilution.  Musk says he wants to burn the shorts but ask any Tesla short out there what they would most fear, and I think they would all say an equity capital raise.  $3-5 billion would get Tesla at least through 2019 no matter how bad the cash burn remained and give the company space to solve its operational problems.
5. Get someone who knows how to build cars building the cars.  I have written about this before -- it is always hard when you are trying to be a disruptor of an industry to decide what to disrupt and what industry knowledge to incorporate.  In retrospect, Musk's plan to ignore how cars are built and do it a different way is not working.  Not only are the cost issues and throughput issues, but there are growing reports of real quality issues in model 3's.  This has to be fixed ASAP.
6. Bring some sanity to the long-term product roadmap.  This may be a bit cynical, but Tesla seems to introduce a new product every time Musk needs to divert the public's attention, his equivalent of yelling "Squirrel!"  There is the semi, a pickup truck, a roadster and probably something else I have forgotten about.  Even the model 3 lineup is confusing, with no one really knowing what Tesla is going to focus on, and whether the promised $35,000 model 3 will ever actually be built.  This confusion doesn't work well with investors at all, but Tesla has been able to make it work with customers, increasing the buzz around the company because no one ever seems to know what it will do next.  But once real competitors start coming out from GM, Volvo, Jaguar, BMW and others, this is not going to work.  Customers that are currently captive to Tesla will have other options.    Let's start with the semi.  The demo was a beautiful product, but frankly there is no way Tesla is going to have the time or the money to actually produce this thing.   Someone like Volvo is going to beat them to the punch.   They need to find a JV partner who can actually build it.

Update:  If I had a #7, it would be: Invent a time machine and go back and undo the corrupt SolarCity buyout, in which Tesla bailed out Musk's friends and family and promptly proceeded to essentially shut down the company.  Tesla shareholders got nothing from the purchase except a lot of debt.

This seems to be a generation in which good intentions are enough.  Actually, I am not sure this is exactly right, let me try again.  This seems to be a generation in which the signaling of good intentions is enough.

I just can't understand how Elon still manages to love humanity. All I see is people failing him at every step. He so genuinely wants to take the human species forward with all his strength. And who is stopping him? The very humanity he set out to push to greater heights.

— Krishna Mohan (@p_krishna_mohan) August 19, 2018

Socialism will work because we have good intentions for it.  Trade wars will work because we have good intentions.  Tesla is valuable because it has good intentions.

Democratic socialism supporters don't even know what socialism is.  Trump supporters don't understand squat about economics but just feel that Trump genuinely wants to help them.  Tesla bulls don't even try to look at a balance sheet but just really, really love the idea of Elon Musk being a real-life but progressive Tony Stark.  Not sure where I am going with this, but just frustrated this morning trying to talk policy in a world of virtue-signalling.  In the last few elections I have been presented with discouraging but predictable choices.  Now I am presented with a choice between two parties that have both lost their minds.

As a train enthusiast, I have to admit this sings to me.  I give them double points for being honest that their technology is not yet economic

The wind doesn't always blow, the sun doesn't always shine. So utilities are in search of ways to store surplus energy when they've got it, so they can distribute it later, when it's needed.

The most "duh" approach to energy storage is very big batteries like the ones Elon Musk peddles, which are poised to become a lot cheaper in the next five years. Pumped hydroelectric facilities are another option. Or you can move compressed air around underground caves. But none of these options has emerged as the best way to fix the grid.

Then there's rail energy storage, which is about to get its grand debut. In April, the Bureau of Land Management approved an ARES—that's Advanced Rail Energy Storage—project, conceived by a Santa Barbara-based energy startup called, well, ARES. By 2019, ARES operations head Francesca Cava says, the facility will occupy 106 acres in the excellently-named town of Pahrump, Nevada. By running a train up and down a hill, ARES can help utilities add to and subtract from the grid as needed.

It's a wonderfully simple idea, a 19th century solution for a 21st century problem, with some help from the abundant natural resource that is gravity. When the local utility's got surplus electricity, it powers up the electric motors that drag 9,600 tons of rock- and concrete-filled railcars up a 2,000-foot hill. When it's got a deficit, 9,600 tons of railcar rumble down, and those motors generate electricity via regenerative braking—the same way your Prius does. Effectively, all the energy used to move the train up the hill is stored, and recouped when it comes back down.

 

Readers know I am in the campground business.   Years ago there was a trend towards building super-luxury campgrounds for as much as $30,000 a camp site.  I never understood how anyone could get a return from this.  Finally I had a guy from a large campground and RV park REIT tell me, "You know how you make money on a $30,000 a site campground?  You wait for it to go bankrupt and buy it for $5,000 a site."

This is what I think the end game for Tesla may be.  I just don't think there is enough available capital in the world, and enough operational focus in Elon Musk, to see their way through to bootstrapping an entirely new worldwide automotive firm, including new dealerships, manufacturing plants, charging networks, etc.  Remember, Tesla does not just need capital for R&D and manufacturing, they also need it for the whole sales / service / fueling network.  Kia, for example, can grow with less capital because it can get independent business people to invest in the service and dealer networks and rely on existing gas stations for the fueling network.  Tesla must build all of this from scratch because of choices they made early in their development.

Even without an LBO, I think they were going to fail at this (despite having some good products) and others disagree with me.  But given the amount of debt that an LBO at $420 might take, and the subsequent rejection of the largest public capital markets, I don't think there is any way Tesla could head off a failure.  People who want to lionize Elon Musk forget that SolarCity was headed for exactly this same kind of cash crunch, only to be bailed out by a crony insider transaction with Tesla (much to the detriment of Tesla shareholders).

Right now, GM, Ford, Daimler .. pretty much any of the auto majors, would do well by buying Tesla.  It would help them with an instant presence in the BEV market and it would help Tesla by solving some of the sales and service investment and manufacturing operations problems they have.  But Tesla is just too damn expensive.  Right now the company is worth more than either GM or Ford.

I see the future after at $420 LBO as a failure in 24 months followed by a purchase by an auto major thereafter.

Frequent readers will know that I have expressed both admiration and skepticism for Elon Musk's various business ventures.   SpaceX is cool.  I am extremely skeptical of the hyperloop, which looks like the technological equivalent of the emperor's new clothes.  I thought Tesla's acquisition of nearly-bankrupt SolarCity was corrupt insider self-dealing.  I think the initial Tesla cars were terrific products but that Musk's management is likely to kill the company.

Lately, I have tried to avoid discussing Tesla and Musk much because I don't want to turn this into a dedicated blog on those two subjects.  Also, with all the press (positive and negative) that it gets, another article on Tesla is about as necessary as another article on Stormy Daniels.  I even resisted the urge to comment on Musk's childish need to insert himself into the Thai cave rescue story and his subsequent rant on Twitter petulantly calling one member of the rescue team a pedophile because he did not use Musk's submarine.  Lol, a submarine for a rescue where one passage was so narrow a diver wearing tanks could not even squeeze through.

My will to avoid Musk and Tesla on this blog collapsed the other day when Musk personally called the employer of one of Tesla's harshest (and I would add most intelligent) critics pseudonymed Montana Skeptic, and threatened to sue the critic and get him fired unless he shut down his criticism.  He succeeded, as Montana Skeptic was forced to shut down and issue this statement:

Yesterday, July 23, I decided to cease writing about Tesla (TSLA) here at Seeking Alpha web site. I also deactivated my Twitter account, where I was @MontanaSkeptic1. Here is what prompted those decisions.

Yesterday afternoon, the principal of the family office in which I am employed received a communication from someone purporting to be Elon Musk. Doubtful that Elon Musk could actually be attempting to contact him, my employer asked one of my colleagues to investigate and respond.

My colleague then spoke by phone with Elon Musk (it was indeed him). Mr. Musk complained to my colleague about my writing at Seeking Alpha and on Twitter. Mr. Musk said if I continued to write, he would engage counsel and sue me.

My colleague then spoke with me about the phone call. We both agreed that Mr. Musk’s phone call and threatened lawsuit were actions that would tend to involve our employer in matters in which he has had no part. To avoid such a consequence, I offered to immediately cease writing at Seeking Alpha and to deactivate my Twitter account.

How did Mr. Musk learn my identity, and that of my employer? It appears to me his information came thanks to the doxing efforts of some of his followers on Twitter.

Neither Mr. Musk nor Tesla has ever attempted, at any time, to contact me. Instead, Mr. Musk determined to go directly to my employer.

I do not know what Mr. Musk’s precise complaints are about me. I do not believe he has any valid legal claim, and I would have no trepidation in defending myself vigorously were he to bring such a claim. My response to his threats were simply to protect my employer and preserve my employment.

And so, you might say, Elon Musk has won this round. He has silenced a critic. But he has many, many critics, and he cannot silence them all, and the truth will out.

Folks who have read the book "Bad Blood" about Theranos will recognize this behavior immediately.  Musk took advantage of the work of some of his fanboys who bravely doxxed Montana Skeptic and allowed Musk to determine his true identity.   Musk is certainly a child (emphasis on "child") of his age, preferring to force critics to shut up rather than respond to them in a reasoned manner.  And by the way, where the hell is his board of directors?  Just like at Uber, it is time for the grown-ups to come in and take over the visionary but flawed company started by their founder.

If you have a chance, you really should look at at least some of Montana Skeptic's work.  He was fact-based and analytical -- this is not some wild crazy social media guy going off on biased rants.  I would take Musk's action as a ringing endorsement of Montana Skeptic's analysis, most of which you can find here but require a Seeking Alpha membership.  However, if you have time to listen, the Quoth the Raven podcast has two good episodes with Montana Skeptic on Telsa (#23 and #28).

By the way, Elon.  If you wish, you may contact my employer here.

I am often critical of Elon Musk and Tesla, and will be again later in this post, but I wanted to start by sympathizing with Tesla's plight.  As you may know, Tesla set out not only to produce a leading electric car (which it did) but also to reinvent automobile manufacturing (which it is struggling to do).  One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep.  Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with.  But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently.  In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production.  Musk even recently admitted it may have gone overboard on factory automation.

I don't agree with all the conclusions, but I thought this was an interesting article on Tesla vs. Toyota production practices and the industry lessons Tesla may have been too quick to ignore.  One quote I liked, “Machines are good for repetitive things… but they can’t improve their own efficiency or the quality of their work.”  I sympathize with Musk on this one.  You CAN"T upend an industry by copying everything it does -- you have to go off in a different direction, at least on some things.  It may be that Musk eschewed the wrong bits of industry practice, but this is an understandable mistake.

What is not understandable is Musk's lack of transparency, his self-dealing, his wild and unfulfilled promises, and his unprofessional behavior.  Some notes:

• A few months ago, at the Tesla truck launch, I wrote:

But Tesla needs to stay hot. California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket. Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year. So out came Musk yesterday to yell SQUIRREL!

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3. The factory appears to be in disarray and out of production and inventory space. They can't produce enough batteries yet for the cars they are already making. So what does Musk do? Announce two entirely new vehicle platforms for tiny niche markets.

I saw the truck launch as a cynical ploy to distract from Tesla's operating problems and perhaps to get a bit of financing in the form of customer deposits (a growing percentage of Tesla's available cash is from customer advance deposits).  There was no way it could do anyting with this truck, given its operating problems and lack of capital.  It seems that I was on target, because not even 6 months later Tesla has tired of pretending the truck is going anywhere.  After Telsa did not even mention the semi in their earnings conference call, Musk said in answer to a question:

I actually don't know how many reservations we have for the Semi. About 2,000? Okay. I mean, we haven't really tried to sell the Semi. It's not like there's like an ongoing sales effort, so sales – orders for Semi are like opportunistic, really companies approaching us. Yeah, it's not something we really think about much.

• Elon Musk proved himself on the same conference call to be a spoiled brat who has spent too much of his time having people kiss his feet and compare him to Tony Stark.

One week ago, Elon Musk entered the history books for his unprecedented, petulant handling of "boring, boneheaded" questions from two sellside analysts, who merely wanted more details about the company chronic cash/rollout issues.  And no phrase captures Musk's descent better than "These questions are so dry. They're killing me."  That's what Musk told RBC analyst Joseph Spak in response to a question about Model 3 reservations.

My older readers will know that my dad was President of Exxon from the early 70's (a few weeks before the Arab oil embargo) until the late 1980's.  In that job he never had to do analyst calls, but he did about 15 annual shareholders meetings.  I don't know how they run today but in those days any shareholder with a question or a rant could line up and fire away.  Every person with a legitimate beef, every vocal person who hated oil companies and were pissed off about oil prices, every conspiracy theorist convinced Exxon was secretly formulating chemtrail material or whatever, and every outright crazy would buy one share of stock and show up to have their moment on stage.  My dad probably fantasized about how awesome it would be to just get asked dry financial questions about cash flow.  And through all the nuts and crazy questions and outright accusations that he was the most evil person on the planet, dad kept his cool and never once lost it.

If you asked him about it, he likely would not have talked about it.  Dad -- who grew up dirt poor with polio in rural Depression Iowa -- was from that  generation that really did not talk about their personal adversity much and certainly did not compete for victim status.  He probably would just have joked that the loonies at the shareholder meeting were nothing compared to Congress.  My favorite story was that Scoop Jackson once called him to testify in the Senate twice in 6 months or so.  The first time, just before the embargo, he was trying to save the Alaska pipeline project and Jackson accused Exxon of being greedy and trying to produce more oil than was needed.  The second time was just after the embargo, and Jackson accused Exxon of being greedy and hiding oil offshore in tankers to make sure the world had less oil than it needed.

Through all of this, the only time I ever saw him really mad was when Johnny Carson made a joke about killing the president of Exxon (he asked his audience to raise their hands if they thought they would actually get convicted for killing the president of Exxon) and over the next several days our family received hundreds of death threats.  These had to be treated fairly credibly at the time because terrorists were frequently attacking, kidnapping, and bombing oil company executives and their families.  We had friends whose housekeeper's hand was blown off by a letter bomb, and I was not able to travel outside of the country for many years for fear of kidnapping.  (For Firefly fans, if you remember the scene of Mal always cutting his apples because he feared bombs in them from a old war experience, you might recognize how, to this day, I still open packages slowly and carefully.

This is a long way of saying that Elon Musk needs to grow the hell up.

Nobody really liked Jeff Skilling of Enron and he sits in jail for 20 years.  We think Elizabeth Holmes is attractive and cool so that despite the fact that she committed serial fraud in lying about her company's technology and financials (far more baldly and egregiously than Skilling) and actually put people at risk through faulty medical testing, she got only a slap on the wrist.

And then there is Elon Musk.

The Economist used to be boring, but smart with a wicked dry wit. Now it’s just boring (sigh). Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money.

— Elon Musk (@elonmusk) April 13, 2018

I am not sure how I got in the role of fact-checking Elon Musk, but given the company's stated results to date and announced operating plans and strategies, there is simply no way for the Tesla to be profitable and cash flow positive in Q3, barring some deus ex machina like a massive energy credit or California subsidy windfall.  It's possible I could go in there and shut down R&D and model 3 production and milk the Model S and X for cash and might make this be true, but that is certainly not their announced business plan.  On their current path Tesla has to continue to burn cash through the rest of this year.  I am not even sure that if you stated their gross margin the same way that other automakers state their numbers that even it would be positive right now -- there is an argument to be made they are still losing money at the margin on every car they produce**.  I would add that in this point of their ramp, if you want to see Tesla the huge success that is baked into its current stock valuation, you don't want Tesla to be cash flow positive in the third quarter, you want it continuing to invest.   Amazon rules the world because it deferred profitability for years in favor of growth.

Tesla pretty much never ever lives up to Musk's promises, at least for the dates he promises them.  That is probably OK with things like deliveries of new products -- people understand he is pushing technology and new products can be delayed and they forgive entrepreneurs for being -- shall we say -- overly enthusiastic about such things.   But on financial stuff like this his statements are bordering on fraud.  But he'll never get called on it, because we like him in a way we didn't like Skilling.

I will add that if Musk wants to get snippy about the media's guesses about his company's prospects, and thinks we are all getting it wrong, he could sure be a lot more transparent about Tesla's financials and plans.  Go watch an Exxon-Mobil analyst presentation and compare it to Musk's quarterly arm-waving.  Also, one final memo to Musk:  responding to your critics on Twitter emulating Trump's style is not recommended.  Though it might be interesting to compare the irrational populist wave behind Trump with the populist wave behind Tesla.  Though the two Venn diagrams of supporters probably do not overlap much, the whole relationship feels similar to me.

Disclosure:  I have been short TSLA in the past but right now have no position.  To be honest, I am going to let Musk urge his fanboys to pump the stock a bit further before I short again.  The fanboy effect makes TSLA a dangerous short, as TSLA stock holders will defy reality for far longer than will holders of say GE or XOM.

** gross margin at TSLA is interesting because TSLA has no dealer network, something I like them for.  GM discounts its cars to their dealers (10% or so?) but in turn they offload a bunch of selling and support costs to the dealers.  In their gross margin, TSLA banks in their gross margin the extra 10% from not having to discount their cars but in turn does not charge gross margin for a lot of the extra sales and support costs they have to take on -- instead they drop these costs into SG&A overhead. The situation with gross margin is even more complicated because Tesla not only has to build out and operate its own warranty service, sales, and delivery network to replace traditional dealers, it is also building out its own fueling service to replace gas stations.  Here is one guy who thinks Tesla gross margin is really negative.  I have zero idea who he is but for the last year his predictions about Tesla have been a lot more reliable than Musk's statements.

Tesla agreed to give Elon Musk what is potentially the richest executive compensation package ever.  I will give my (*gasp*) cynical reason why I think they did this.  I can show you in one chart (Tesla Model 3 production, from Bloomberg):

I would argue that Elon Musk is the only one in the world who can run a company with so many spectacular failures to meet commitments and still have investors and customers coming back and begging for more.  A relatively large percentage of Teslas get delivered with manufacturing defects and their customers sing their praises (even while circulating delivery defect checklists).  Tesla keeps publishing Model 3 production hockey sticks (apparently with a straight face) and consistently miss (each quarter pushing back the forecast one quarter) and investors line up to buy more stock.  Tesla runs one of the least transparent major public companies in this country (so much so that people like Bloomberg have to spend enormous efforts just to estimate what is going on there) and no one is fazed.  Competitors like Volvo and Volkswagon and Toyota and even GM have started to push their EV technology past Tesla and actually sell more EV's than does Tesla (with the gap widening) and investors still treat Tesla like it has a 10-year unassailable lead on competition.

All because Elon Musk can stand up at a venue like SXSW, wave his hands, spin big visions, and the stock goes up $3 billion the next day.   Exxon-Mobil has a long history of meeting promises, reveals its capital spending plans in great detail, but misses on earnings by a few cents and loses $40 billion in market cap.  GE lost over half its market value when investors got uncomfortable with their lack of transparency and their failures to meet commitments.   Not so at Tesla, in large part because Elon Musk is PT Barnum reincarnated, or given the SpaceX business, he is Delos D. Harriman made real.

Disclosure:  I don't currently have any position in TSLA but over the last 2 years I have sold short when it reaches around $350 (e.g. after Elon Musk speaks) and buy to cover around $305 (e.g. when actual operational or financial data is released).  Sort of the mirror image of BTFD.

I continue to marvel at the nearly 100% positive press Elon Musk gets for his Hyperloop project.  For those who do not know, that is his concept for a high speed transportation system that can achieve high speeds in part because it is in a vacuum sealed tube.  Here is an update on the project and a picture of a prototype below:

So here is the story so far:  We know that the main barrier to high speed rail projects is that they are astonishingly expensive to build and maintain given the high cost of the right-of-way acquisition and building track to the very high standards necessary to support safe high speeds.   See for example California high speed rail, which is following some sort of crazed Moore's law where the cost estimate doubles every 18 months.

So we are going to fix the cost problem by ... requiring that the "track" be a perfectly smooth sealed pressure vessel under vacuum that is hundreds of miles long?  What about this approach isn't likely an order of magnitude more expensive than rail?  The prototype above which allows only one way travel cost about a billion dollars per mile to build.  And with a lot less functionality, as current prototypes envision 10-20 person sleds, one step beyond even the worst airline middle seat in terms of likely claustrophobia, and less than half the capacity of a bus.  It would take 15-20 of these sleds just to move the passengers from a typical aircraft.   Not to mention the fact that there is no easy way to do switching and a return trip requires a second parallel track.  All to reach speeds perhaps 20% higher than air travel.

Sure, I can be wrong.  For example, if the hyperloop handled grades better than a train, that would reduce costs somewhat.   But why does no one seem to ask obvious questions like this?   It's like Musk exudes some sort of skepticism dampening field around him (look at Tesla:  the company is fraught with issues and the stock price was falling until Musk did one of his hand-waving presentation specials at SXSW and the stock goes back up 30 points).  But if you read carefully, most of the hyperloop progress in the article linked is for getting handouts from government (something Musk excels at) including money for scoping studies of lines that will never exist and money for new buildings and workshops.

Y'all know I have a certain distaste for Elon Musk's rent-seeking, but as I have written before there is nothing much cooler than several billionaires competing at space travel.   The video below is of today's apparently succesful Falcon Heavy launch, but while the launch is as cool as always, what was really new and beautiful was the near simultaneous side by side landing of the two booster rockets.   Booster landing starts around the 36:30 minute mark.

I will say that Musk's promotional abilities do remind me sometimes of DD Harriman.

Name the field:  Housing, education, health care.  In most any industry you can name, the sum of the government's interventions tend to subsidize demand and restrict supply.  In health care for example, programs like Medicaid, Obamacare, Medicare, and others subsidize demand while physician licensing, long drug approvals and prescription requirements, certificates of need, etc restrict supply.

If you are wondering why, it turns out that most government regulatory processes are captured by current incumbents, who work to get the government to subsidize customers to buy their product or service while simultaneously having the government block upstart competitors, either foreign or domestic.  For example in housing, existing homeowners form a powerful lobby that limits housing supply through restrictive zoning while demanding that the government subsidize mortgage interest (as well as low-cost mortgage programs) and give special tax treatment to capital gains from homes.   The result in every industry is supply shortages and rising prices.

Yesterday, we saw another classic example.  Federal, state and local governments have spent billions of dollars over the last decades subsidizing solar panel installations in homes and businesses.  But now, they are also simultaneously restricting the supply of solar panels:

President Donald Trump is once again burnishing his protectionist bona fides by slapping imported solar cells and washing machines with 30% tariffs - his most significant action taking aim at the world's second-largest economy since he ordered an investigation into Chinese IP practices that could result in tariffs.

Acting on recommendations from US Trade Representative Robert Lighthizer, Trump imposed the sliding tariffs. Solar imports will face a 30% tarifffor the first year, then the tariff will decline to 15% by the fourth year.It also exempts the first 2.5 gigawatts of imported cells and modules, according to Bloomberg.

And... who would have guessed that Elon Musk would be on the receiving end of another government crony handout?  The patron saint of subsidy consumption will get yet another, as Tesla's solar city is currently building a large domestic panel manufacturing plant, an investment decision that makes little sense without tariff protection.

I had to laugh at the stories the other day on the battery backup system Elon Musk and Tesla made for the Australian Power grid:

Tesla has completed its 100 megawatt Powerpack battery backup system in South Australia within 100 days (easily), as Elon Musk had promised. That means the company essentially won the "bet," and won't be on the hook for the entire cost of the project, estimated at $50 million. More importantly, it means that some 30,000 homes in South Australia will have a power backup in case there's no breeze at the Hornsdale Wind Farm located about two hours from Adelaide.

A megawatt is a measure of energy production or transmission rate.  As such, it is a perfectly appropriate way to size the capacity of a power plant that is assumed to have a continuous supply of fuel.  However, it is an extremely odd way to size a battery.  A battery has a fixed energy storage capacity, which is generally measured in watt-hours (or some conversion thereof). For example a 10 Wh battery would provide 10 watts for an hour before running out, or 5 watts for 2 hours, etc.  It is not clear if this is just a typo, that they really mean 100MWh, or if 100 megawatts is the peak discharge rate and they are being silent on exactly how long this lasts (ie how long can those 30,000 homes be powered?)  I checked the first 10 sources in a Google search and not a single media outlet that routinely chastises climate skeptics for being anti-science seems to have questioned the oddball and nearly meaningless 100MW figure.

I was going to compare the number on energy storage here and show that you could actually generate electricity from gas, not just store it, for well less than this.  But it is sort of hard to make the calculation when they don't get the units right.

By the way, if this is required to make wind power work, will we start seeing wind advocates building in $50 million batteries when they present their economics?  Any bets?

It is hard not to be conflicted about Elon Musk.  On the good side, he is pursuing fabulous and exciting goals  - space travel, high speed transportation, cheap tunnels, ubiquitous electric cars.  Listening to Musk is like riding through Disney's various Tomorrowland visions.  As a consumer, I love him.

As a taxpayer, I am not so thrilled.  Many of his companies (SolarCity and Tesla in particular) seem designed primarily as magnets for government subsidies.

But it is his shareholders I really have to wonder about.  I can't remember anyone in my lifetime who was so good at serving his shareholders Spam and convincing them they were eating filet mignon from a Michelin three star restaurant.  He announces quarter after quarter of failed expectations and greater-than-expected losses and then stands on stage and spins out all new visions and his fan-boys bid the stock to new all-time highs -- in fact to market valuations higher than GM, Ford, Nissan, or Honda.  Tesla's debt priced in the last offering well above what it should have given its rating and risks.   I thought his purchase by Tesla of his near-bankrupt other company Solar City had no strategic logic and was borderline corrupt, but my brother-in-law who is arguably a more successful entrepreneur than I thought it was brilliant, an example of Musk playing chess when everyone else is playing checkers.

So last week Tesla announced a really bad third quarter.  They lost a lot more money than they said they would, and produced a lot fewer of their new Model 3 cars than they promised.  Their manufacturing operations are in disarray and they are burning cash like crazy, such that the billions of funding they just raised will get burned up in just a couple more months.

But Tesla needs to stay hot.  California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket.  Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year.  So out came Musk yesterday to yell

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3.  The factory appears to be in disarray and out of production and inventory space.  They can't produce enough batteries yet for the cars they are already making.  So what does Musk do?  Announce two entirely new vehicle platforms for tiny niche markets.

A workhorse truck and a new super car are in the works for Tesla, after founder and CEO Elon Musk introduced his company's latest effort to widen the U.S. market for electric vehicles Thursday night. Musk called the Roadster "the fastest production car ever made, period."

Musk unveiled the Roadster toward the end of an event that was supposed to be all about Tesla's new Semi trucks. Taking a page from Apple and other tech companies in using showmanship to wow crowds, Musk surprised the crowd by announcing there was one more thing to add — and the new car rolled out of the truck's trailer.

After touting the utility and efficiency of what he called a game-changing truck, Musk welcomed the Roadster to cheers from those attending the event at the Hawthorne Municipal Airport near Los Angeles.

You have to hand it to Musk -- no other car company could get a good bump in their stock by displaying what essentially are two concept cars with infinitesimal revenue potential.  Expect Tesla to have a bond or stock offering out soon while everyone still has stars in their eyes from these new vehicles and before anyone can refocus on production and profitability issues.