Bad Earnings and Subsidy Controversy Hound Musk, Tesla

Elon Musk ModelSLast time NLPC checked on Tesla Motors – as 2014 closed – we noted a growing skepticism largely due to CEO Elon Musk’s consistent habit of overpromising production and results, without delivering.

Then ten days ago he reported year-end earnings, and matters have worsened, although you wouldn’t know it from most of the undeterred “rah-rah” media and Wall Street fanboys. But there are exceptions.

First, the brutal basics – Tesla suffered a fourth-quarter loss of $107.6 million, which was nearly seven times the loss ($16.3 million) during the same period last year. The company lost $294 million for the whole year, compared to a $74 million loss in 2013, and has not recorded a profit in its history (except in a couple of quarters where it employed accounting gimmickry and depended heavily on subsidies). According to Associated Press, analysts expected a profit of 30 cents per share, but Tesla delivered a 13 cents-per-share loss in the fourth quarter. High hopes for sales in China were not met. Dependence on government subsidies – much of it via the market-distorted zero-emission vehicle credits – prevented Tesla from experiencing an even worse loss. And while the company is already rapidly burning cash, Musk announced on the February 12 earnings call that he plans “to spend staggering amounts of money” in 2015.

Add those dismal outcomes to previous reported performance shortcomings such as phantom battery swapping stations, unimpressive “Superchargers” and unrealized battery and vehicle production, and you’d think you’re looking at a company facing bankruptcy. Instead we see a respected Morgan Stanley analyst who says not to worry about Tesla’s cash burn because its technology is “capable” of “disruption” in the auto industry! And as for the common projection that the electric automaker isn’t likely to be profitable before 2020 – no problem!

Nevertheless, as was suggested by NLPC two months ago, the doubts about Tesla’s viability are increasing. Most caustic about the February earnings report was CNBC’s Jim Cramer, who flatly called it a “bad company” with great cars. The host of “Mad Money” roasted Musk for the many excuses he made for the poor fourth quarter performance.

In an essay for TheStreet.com (where he is co-founder and chairman), Cramer mocked Musk’s explanation for poor sales that claimed it was impossible to deliver cars because of “customers being on vacation, severe winter weather and shipping problems.” He blamed failures in China on “brain-dead” salesmen. As for the accounting, Musk said, “our financials are better than they appear, not worse.” And then there are the constant-but-unjustified favorable comparisons of Tesla to Apple, which are usually made by green-techies and Wall Street positivists, which Musk embraces. He said with consistent growth and “significant” capital expenditures the company could parallel Apple in ten years.

“To which I say, where the heck is the money going to come from? The cultists?” wondered Cramer, invoking a term he uses to characterize Tesla investors.

Less sarcastic but similarly concerned was analyst Karl Brauer of Kelly Blue Book. He sees Tesla at a critical point where if it doesn’t come through with a timely delivery of the long-expected Model X SUV this year, and the lower-cost Model 3 after that, the consequences could be difficult to overcome. That’s not encouraging considering Musk’s track record.

“In 2015 there's going to be no getting away from these big rocks he’s got to move," Brauer said to the Silicon Valley Business Journal. “We’re starting to hit an inflection point where things kind of have to go really well and if any one of them unravels, everything does.”

Then there are the increasing calls to shut off Tesla’s subsidies. The editorialists at Wall Street Journal Europe noted the company has benefited from more than $300 million in public support since 2011, while it’s valued at about $27 billion (on the stock market).

“Capitalism needs visionaries, but its reputation suffers when companies worth billions soak middle-class taxpayers for profits,” the Journal opined. “Turn off the taxpayer tap, Mr. Musk. It would earn you more friends for the long haul.”

And Bloomberg’s editors slammed the zero-emissions vehicle credits scheme.

“The success of electric cars generally – and of Tesla in particular – is due in no small part to a government mandate,” they wrote. “And that mandate is distorting the auto market without clear evidence that it’s going to achieve its stated purpose.”

Those are not promising indicators for the glib CEO and the company that heavily depends on the public dole and ever-“reachable” (but never reached) production goals. While Tesla’s stock has recovered somewhat from the earnings call 10 days ago, it is down about 25 percent from the high it reached last summer. But a large contingent of prognosticators continue to advise betting on Musk, with the legally required cautions.

Cramer is not among them, and the financial report was defining.

“This was a fiasco miss of immense proportions, coupled with the arrogance of a Steve Jobs, without the wonderment to back it up.”

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes CarolinaPlottHound.com, an aggregator of North Carolina news.