Brendan McDermid/Reuters
Elon Musk
- Tesla's legal and financial troubles came to a head this week as the company's reported weak deliveries and its CEO went to Court in Manhattan.
- This is a continuation of the company's troubles in 2019, and investors are starting to wonder about Musk's leadership and the company's cash position.
- "This f---ing guy's crazy," one investor told Business Insider.
You should forgive yourself if this is the first time you're hearing that billionaire entrepreneur Elon Musk - with his eyes staring straight ahead unblinking - went before a Judge in Manhattan on Thursday.
He was there flanked by his security guards and three lawyers. The Securities and Exchange Commission (SEC) was there, represented by three more lawyers. There were journalists and hobbyists and short sellers in the packed court room, all waiting to see if Judge Alison Nathan would hold Musk in contempt of Court for violating an order from the SEC.
The order was meant to stop Musk from making material statements about his car company, Tesla, on Twitter without approval from an attorney designated by the court. You'll recall that he caused company-wide chaos last August when he tweeted he had "funding secured" to take the company private, with the SEC later describing this and other tweets as "false and misleading."
But the SEC says he violated the rules in February, that Tesla would make 500,000 cars in 2019. It will not.
And we know it will not just because the company itself has announced lower projections (400,000 at the top), but also because of the other pressing disaster in Tesla land right now - it is not selling enough cars.
The same day Musk sat in the courtroom Tesla's stock was falling around 9%. On Wednesday night - after two days of hemming and hawing - the company released its first quarter delivery numbers. They were worse than most analysts had imagined. Tesla delivered only 63,000 cars, about 31% lower than the quarter before. And most devastatingly, Tesla was hit the hardest on its most lucrative cars, the luxury - S and X - which saw their sales cut in more than half.
Given all of the problems on his plate it's no wonder Musk seemed relieved when the Judge deferred a decision on whether or not he was in contempt of court, and asked his lawyers to meet with the SEC once in the next two weeks to see if they could carve out a deal."Put on your reasonableness pants on," she said. Or she would decide Musk's fate.
Musk left the courtroom and promptly put out a statement dripping with vindication. "I have great respect for Judge Nathan, and I'm pleased with her decision today. The tweet in question was true, immaterial to shareholders, and in no way a violation of my agreement with the SEC..." it said. (Judge Nathan had not said any of that.)
It went on: "We have always felt that we should be able to work through any disagreements directly with the SEC, rather than prematurely rushing to court. Today, that is exactly what Judge Nathan instructed."
In a week of losses Musk could be forgiven for trying to eek out some kind of a win. Neither of Musk and Tesla's major struggles - legal or financial - are in any way resolved and even long investors are starting to worry.
"Yeah I own the stock. It's not one of my favorite positions. I just think the cars are leaps and bounds above everything else in this field," said Andrew Left of Citron Research, a man who went from short Tesla to long and loud about it.
"It would be better without Elon... I think this guy is just a big distraction. It kills me. It comes from the top ... the communication is terrible," Left raved. "This f---ing guy's crazy."
The legal issues could get worse, fast. The nightmare scenario in the coming weeks is that the SEC and Musk's lawyers can't come to an agreement and Judge Nathan rules him in contempt.
The financial issues could get worse, fast, too. Tesla will release its Q1 balance sheet in the coming weeks, giving investors a clearer picture of the company's financial position. More bad news could send them running for the hills.
Have a story to share about working for or interacting with Tesla? Contact Business Insider's Linette Lopez at llopez@businessinsider.com.
Markets Insider Tesla's stock price so far this year.
The link
2019 was supposed to be chill at Tesla, not like 2018 when Musk "bet the company" on the success of the Model 3 car and Tesla was "near death"trying to make that happen. It seemed like that paid off when Tesla achieved its first consecutive quarters of profitability in Q3 and Q4.
But then things started going very wrong. There was a round of layoffs that culled 7%. Sales of more expensive versions of the Model 3 (which was initially promised to the public at $35,000) started to fall. Musk said he would shut down all the company's stores, and then he took it back. The price of the cars went down and then up again (there were literally protests in China over that). There was an issue with customs in China that delayed sales. There was Musk's errant tweet, and Tesla's lawyer quit after being at the company for just two months. Then the SEC came knocking. If it sounds chaotic, that's because it has been. One of Tesla's loyal, top shareholders said that Musk "doesn't need to be CEO."
In short: Elon Musk's tenure as CEO has become tortured.
Some investors are like Gene Munster of Loup Ventures. He still thinks Tesla and Musk need each other, but he considers their relationship a challenge as much as an asset.
"It's a catch-22," he told Business Insider. "It would be better if Elon weren't making it harder for himself. As an investor there are some things you need to concede, and you need to concede the stability of a regular company."
In court on Thursday Tesla submitted a letter of support for Musk, but the company itself had not been sanctioned by the SEC for Musk's tweet. That is why the SEC's attorney said Tesla had "for whatever reason thrown its lot in with Mr. Musk... and that is a problem." She added that the agency is still looking into whether or not Tesla shirked its duties by allowing Musk's errant tweet.
As a remedy the SEC suggested putting a new system in place to approve and monitor Musk's tweets. It also suggested a scale of fines if he tweeted misinformation again.
"The company definitely needs more professional management," Chester Spatt, a professor of finance at Carnegie Mellon and former chief economist at the SEC, told Business Insider.
"Musk's lawyers must also be afraid of him. They can't control him," Spatt continued. "I think there's a reasonable chance in the next two weeks that Musk and Tesla overplay their hand in negotiating with the SEC ... I think the SEC, by not trying to take him down, is giving a lot. But in effect Tesla has to comply with the prior settlement, no two ways about that."
Meanwhile, in the background of all this legal drama, the SEC and the Department of Justice are still investigating Tesla and Musk over whether or not they misled investors about the production of the Model 3.
The bet
It is because of the Model 3 that Tesla is in dire financial straights right now. Tesla started out by making a more expensive, longer range version of the car, but it was initially marketed as a $35,000 vehicle for the everyman. Thousands gave the company a $1,000 to reserve one.
But that $35,000 car isn't here yet. And unfortunately sales of the higher margin long range version slumped in Q1. Tesla's luxury cars fared even worse. Analysts are starting to wonder if there is much demand for the cars that will actually make Tesla a profitable company.
"We are lowering our estimates and price target on Tesla shares today (to $200 from $215), reflecting the softer 1Q deliveries and flow-through of what we see as reduced underlying demand going forward for the higher ASP [average selling price] S & X," analysts at JPMorgan wrote.
Like all car companies, Tesla is expensive to run. It needs $1.5 billion to $2 billion on hand to keep the lights on. In March it paid off a $920 billion loan, and it has more debt coming due over the next year. That's partly why Moody's, a ratings agency, warned that despite Tesla's success in 2018, "meaningful pressures weigh on Tesla's credit profile."
And that was even before Q1 deliveries turned out to be a dud. The company is expected to report earnings in the coming weeks, and more bad news will put additional pressure on management to right its financial ship. Most likely it will bring up an old question - will Tesla raise money? The company used to say in no uncertain terms that it would not. Towards the end of last year it softened its stance.
"They're going to lose money March quarter and they didn't think they would. They may lose one in the September quarter too." Munster said. "Why they haven't [raised money] so far? They don't have as much money now as as they said they would six months ago."
Tesla needs money not just to survive, but to finance its plans. It's currently building a factory in China, for which it raised $500 million (due next March) from a syndicate of Chinese banks.
Jae C. Hong/AP Musk at the Model Y unveiling.
It also recently unveiled a new car, the Model Y, which should start production next year. The Model Y's unveiling last month was in and of itself a sign of Tesla's tougher times. There was something missing.
It wasn't the cars. There were plenty of cars. Every model the company had ever made or proposed to make was trotted out for all to see; The Roadster, the Model S, the Model X, the Model 3, the semi truck. It wasn't the hype, because Musk, in a pair of custom made Jordans, was full of it.
What was missing was the affair's usual whiz-bang finale. You see, in Tesla-land, at the end of every unveiling there is an "and one more thing" moment when the company gives the faithful one last wow, pulling another trick from its sleeve. But there was no thing this time, and Wall Street sent the stock down 4% the next day.
The market just didn't seem impressed anymore.
Have a story to share about working for or interacting with Tesla? Contact Business Insider's Linette Lopez at llopez@businessinsider.com.
Get the latest Tesla stock price here.