Analysis

Tesla risks a blowout as problems mount, but fans keep the hype machine in overdrive

Tesla is beset by production problems, it is swimming in debt, its bonds are near junk status, its stock has more people betting against it than any other major company. But there are still good reasons to believe in the world's best known electric car maker.

And no one knows what CEO Elon Musk might have up his sleeve

The licence plate of a loyal Tesla owner proudly proclaims the car's environmental advantages. (Andy Hincenberg/CBC)

Tesla is beset by production problems and swimming in debt, its bonds are considered junk status, its stock has more people betting against it than any other major company. There are real concerns it won't be able to raise enough cash to keep going.

But even with all its problems, there are still very good reasons to believe in the world's best known electric car maker.

"I have absolute confidence that the Model 3 production problems will be solved and that it will be a successful car," says Melissa Schilling, business professor at New York University's Stern School of Business and author of Quirky: The Remarkable Story of the Traits, Foibles, and Genius of Breakthrough Innovators Who Changed the World.

Tesla has suspended production of its Model 3 for the second time since February. The car is the company's first mass market vehicle and is a key component in Tesla's future success.

Tesla had said it would produce 20,000 Model 3s per month by the end of last year. But it only managed to make about 2,500 cars in the last three months of 2017 combined.

Tesla Motors CEO Elon Musk unveils company products in 2015 in Hawthorne, Calif. (Ringo H.W. Chiu/Associated Press)

The problems with the Model 3 have been so acute that Tesla CEO Elon Musk has reportedly been sleeping at the factory in Fremont, Calif., since personally taking over responsibility for production of the $35,000 US vehicle.

The issues with the Model 3 cap a recent series of setbacks for the company. Last month, there was a fatal crash involving the company's famed driver assist technology called Autopilot. A week later, Tesla recalled more than 120,000 Model S's due to a faulty steering mechanism.

There is also a shareholder lawsuit over Tesla's takeover of SolarCity, a solar energy company run by Musk's cousins.

But by far the biggest problems for Tesla are financial. It is spending more than it earns, piling up debt, Moody's recently downgraded its credit rating.

"I worry. I worry a lot about this company," says Charley Grant, who writes the column Heard on the Street for the Wall Street Journal.

Charley Grant, a columnist at the Wall Street Journal, says Tesla is on shaky footing financially. (Dave MacIntosh/CBC)

Grant says Tesla's shaky financial position is further undermined by the issues with the Model 3.

"You almost never see a public company miss its guidance by that much," says Grant.

"It's a real issue because if anyone loses confidence in this company, they depend on having a high stock price to actually fund the business operations."

Burning through cash

Because Tesla isn't making a profit it doesn't have any cash to finance growth or cover losses. A new bond issue would be very difficult; lenders would either be frightened off by Tesla's balance sheet or they'd demand an outsized interest rate.

That leaves a new equity offering, but Tesla can really only issue new shares if the stock price stays high. And Tesla stock has been volatile recently on all the bad news.

"People are worried that investors are being sold a bill of goods that might never come to fruition, ever," says Grant.

Even with all that doom and gloom, though, Grant and others say there are still plenty of reasons to believe in Tesla, not least its CEO.

"Elon Musk is a celebrated visionary. That's why people love him. He's made products that people really like and he's done incredible things in the space exploration project, landing a rocket on a barge," says Grant.

Musk is one of the innovators featured in Schilling's book, along with Steve Jobs, Marie Curie and Thomas Edison. And Schilling says Musk is the main reason she and others are still bullish on Tesla.

Musk is one of the serial innovators Melissa Schilling studied for her book Quirky: The Remarkable Story of the Traits, Foibles, and Genius of Breakthrough Innovators Who Changed the World. (Dave MacIntosh/CBC)

"I think a lot of the people who are in the stock are betting on him, right? They're not looking at the company and doing any kind of math, they're just betting on him," says Schilling

"And I think that's a reasonable bet because he is brilliant.  He can do advanced physical calculus in his head real-time and he thinks 10 steps out. So he's probably done the math, he's probably got a plan, and they are betting that he's got a plan and that it's a great one and that it might not even be one we could understand yet."

As evidence of that, Schilling points to Musk's compensation package. He doesn't get a salary. Rather, he will be eligible for about $2.6 billion in stock options, but only if Tesla hits certain milestones over the next 10 years, one of them being a total company valuation of $650 billion. That's about 10 times the current size of General Motors.

"It's difficult for me to come up with any math that lends itself to thinking you're going to have that market valuation strictly on an auto company," says Schilling.

"But I don't think his plan is to be strictly an auto company."

Priceless consumer loyalty

Schilling says it's far harder to predict future value of the battery production and grid energy storage parts of Tesla's business. She also wouldn't rule out a merger, another way to get to that lofty $650 billion valuation.

Finally, there is another significant asset that Tesla has that simply doesn't show up on the company's bottom line: the fervent loyalty of its customers.

"It is almost a cult," says John Dixon, head on the Tesla Owners Club of Ontario.

Dixon, who owns a Model X, his third Tesla, and has a Model 3 on order, says there are a number of reasons why he and his members have such faith in Musk. For Dixon, they start with his vehicle.

Ontario Tesla drivers take part in a rally near Toronto to raise visibility of the company and its vehicles. (Rob Krbavac/CBC)

"This car, it's quiet, it's relaxing to drive, it's fast when I want it to be, it's got all the technology you would ever want, it's great for a family, and I don't have to buy gas," he says.

"There is next to no service needed. You're not doing oil changes, you're not doing fluid flushes, the brakes last longer because of the regenerative braking."

Members of his club speak to various groups, extolling the virtues of their vehicles, and they've even worked the Tesla booth at the Canadian International AutoShow, all for free.

They do it because of a belief in the car and in the company's CEO.

"He truly believes in the vision of reducing our carbon footprint and reducing the pollution that cars put into the atmosphere," says Dixon.

Aaron Saltzman reports on the latest in a series of issues at Tesla 6:23

aaron.saltzman@cbc.ca

About the Author

Aaron Saltzman

Senior Reporter, Consumer Affairs

Aaron Saltzman is CBC's Senior Reporter for Consumer Affairs. Tips/Story ideas always welcome. aaron.saltzman@cbc.ca twitter.com/cbcsaltzman

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